Interaction between leverage, Dividends and profitability: Simultaneous model approach

According to agency theory, the use of tools such as dividends and leverage can reduce the conflict of interest between managers and shareholders. However, the decision to use one or both of these tools simultaneously, as well as their interrelationships with the profitability of the company is not an easy choice. The present study aims to provide a model to explain the relationship between dividends, leverage and profitability with a simultaneous interaction approach among companies. To achieve the research objectives, 144 companies were selected in the period 2013 – 2018. To test the interrelationship between variables, simultaneous equation measurement methods of three-stage least squares (3SLS) and two-stage (2SLS) are applied. The results of examining the relationship between leverage and profitability based on each 2SLS and 3SLS methods show a positive effect of leverage on companies' profitability, but profitability based on 3SLS method has a simultaneous negative interaction on leverage. Also, the study of the simultaneous relationship between profitability and payable interest showed that these two variables have significant positive mutual effects on each other. The results of the study of the simultaneous interactions of dividends and leverage show that both models emphasize that higher payable interest will lead to higher leverage. However, the simultaneous interaction of leverage on dividends is different in the two models, and this is the only contradiction between the results of these two methods in this study. And in 3SLS a negative effect of leverage on dividends is shown, but 2SLS shows the opposite effect.