International Joint Polish-Swedish Publication Service

Capital Structure and Stock Liquidity: Experimental Test of the Trade-off Theory versus the Peeking Order Theory

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Abstract

The business entities face different financing strategies in their capital structure to achieve an optimal form. In today’s world, business entities are currently facing different financing strategies in their capital structure to achieve an optimal form. One of the main problems is the financing effect on the characteristics of the capital market such as stock liquidity. Therefore, this research is aimed at investigating the relationship between capital structure and stock liquidity with an emphasis on the trade-off theory and the pecking order theory. The data of 146 companies, which are members of the Tehran Stock Exchange, from 2011 to 2016 have been used to test the hypotheses. And the multivariable regression analysis has been used to test the assumptions and the hypotheses. The results of the first hypothesis test show that the Bid-Ask prices increase as the liquidity measure and this in turn results in a decrease in the stock liquidity by increasing the financing via financial leverage. Meanwhile, a significant relationship between debt financing and other stock liquidity measures was not observed in the first hypothesis test. The results of other tests were also approved, the negative relationship between internal and external financing and the liquidity measures. So, the tests provide evidence of the severity of the reverse effect of internal financing over external financing on the stock liquidity which is inconsistent with the pecking order theory. The results of the research indicate that different financing decisions in the Tehran Stock Exchange companies do not have significant effects on stock liquidity and, hence, the cost of corporate capital.

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