Identification of Capital Structure Adjustment Speed Using a Dynamic Model of Optimal Capital Structure; Emphasis on Product Market Competition Factor

Over 50 years of researching into capital structure provides different and sometimes conflicting theories in corporate finance. Among these theories, the trade-off theory with a long background; has been considered in many studies and still is being considered. One of the latest approaches of this theory is dynamic trade-off theory. Regarding to this approach, we have tried to identify the capital structure adjustment speed among the companies of Tehran stock exchange (TSE) in this thesis. Hence we employed a partial dynamic adjustment model with panel data and tried to estimate this speed with advanced econometric methods such as generalized method of moments. Our sample consists of 225 firms for 20 years (1992-2012). The results reveal that Iranian firms adjust quickly toward their target leverages (around 48% per year, according to instrumental variable method and 26% per year, according to generalized method of moments). These rapid adjustment speeds confirm the explanatory power of trade-off theory among Iranian firms in the analyzed period. The other purpose of this thesis is to analyze the relationship between product market competition (measured by Tobin’s Q) and the capital structure of Iranian firms. The results of generalized method of moments estimation, detect a positive relationship between the intensity of competition and leverage ratio, which supports the limited liability models.