The role of the hierarchical theory in explaining the capital structure of the firms based on enterprise life cycle model

Saleth, J.; Aalizadeh, A.

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Accounting

ISSN 2369-7407 (Online) - ISSN 2369-7393 (Print) Quarterly Publication Volume 3 Issue 1 pp. 47-52 , 2017

The role of the hierarchical theory in explaining the capital structure of the firms based on enterprise life cycle model Pages 47-52 Download PDF

Authors: Jamal Bahiri Saleth, Abbas Aalizadeh

DOI: 10.5267/j.ac.2016.5.001

Keywords: Tehran Stock Exchange, The hierarchical theory, Growth, Life cycle

Abstract: Capital structure is a controversial issue in the field of corporate finance. There are several studies to find a way to determine the optimal capital structure to minimize the cost of capital and maximize the corporate value. In fact, capital structure is a combination of firms’ liabilities and capital to meet long term assets. This paper investigates the role of the hierarchical theory in explaining the capital structure of the firms based on enterprise life cycle model on selected firms listed on Tehran Stock Exchange (TSE) using three methods of net equities, net liabilities and retained earnings. The study uses Park and Chen’s (2006) method [Park, Y., & Chen, K. H. (2006). The effect of accounting conservatism and life-cycle stages on firm valuation. Journal of Applied Business Research (JABR), 22(3), 75-92.] to categorize the life cycle of 81 randomly selected firms from TSE over the period 2007-2012. The results indicate that the hierarchical theory represents the growing firms better than the matured firms do. The results also show that firms were more willing to reduce their dividend per share for financing their projects.

How to cite this paper

 Saleth, J & Aalizadeh, A. (2017). The role of the hierarchical theory in explaining the capital structure of the firms based on enterprise life cycle model.Accounting, 3(1), 47-52.

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