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The Relationship between Capital Structure and Firm Performance: The Moderating Role of Agency Cost by Amanj Mohamed Ahmed; Deni Pandu Nugraha; István Hágen is a Economics, Econometrics and Finance article available to read on EtoBox.

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Since it first appeared, agency theory has argued that debt can decrease agency issues between agent and principal and enhance the value of firms. This paper explores the moderating effect of agency cost on the association between capital structure and firm performance. A panel econometric method, namely a fixed-effect regression model, was used to evaluate the above description. This investigation uses secondary data collected from published annual reports of manufacturing firms listed on Tehran Stock Exchange (TSE) during 2011–2019. Empirical results show that capital structure is negatively related to firm performance. Agency cost also has a negative impact on corporate performance; however, in the case of ROA and EPS, the relationship is positive. Interestingly, the findings illustrate that increasing the level of debt can reduce agency costs and enhance firm performance. Moreover, robust correlations are revealing that agency cost significantly affects the relationship between capital structure and corporate performance. These findings provide proof to support the assumptions of agency theory, which explains the association between capital structure and performance of firms. T

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Author

Amanj Mohamed Ahmed; Deni Pandu Nugraha; István Hágen

Publisher

MDPI AG

Published

2023

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)