The Effect of Firm Financial Situation and Industry Characteristics on Capital Structure Adjustment: Evidence from a Distressed Market

The aim of the study is to investigate the relationship between the corporate financial situation and industry characteristics with capital structure adjustment in an inflationary market called Iran. The study population consists of 1150 observations and 115 firms listed on the Tehran Stock Exchange (TSE) during a decade between 2009 and 2018.The statistical model used in our study is a multivariate regression model; further, the statistical technique used to test the hypotheses is panel data. Consistent with the Market positioning theory, the results indicate that since Iranian companies have many financial problems because of severe economic sanctions, they do not care about the type of financing, that is, whether it is debt or equity. According to the conditions of the financial markets, they only choose that kind of financing that is most valuable to their firms. Furthermore, in line with the Pecking Order theory, Iranian firms have no optimal debt ratio. Hence, the observed debt ratio of each company reflects its total needs for external financing. This article is one of the most comprehensive studiesin Iran that simultaneously surveys the impacts of firm financial situation and industry characteristics on capital structure adjustment. What really will fascinate other scholars about our paper is the time period of the study because there were unprecedented sanctions against Iran market and many manufacturing industries were in financial strain. Without hesitation, the paper makes aware financial analysts of this fact that the market conditions of each country make it possible for companies to choose the type of financing.

Keywords: Firm financial position, Industry characteristics, Capital structure adjustment, Market Positioning theory, and Pecking Order theory.