The effect of financial distress costs on ownership structure and debt policy : An application of simultaneous equations in Iran

Purpose The purpose of this paper is to examine the effect of financial distress costs, corporate growth rate, and flexibility on the interaction between ownership structure and corporate debt policy. Design/methodology/approach The authors test the hypotheses by employing simultaneous equations system methodology with two-stage least squares regression and panel data technics on a sample of 786 listed companies on the Tehran Stock Exchange during 2010-2015. Findings The results indicate that there is a positive and significant relationship between corporate debt level and managerial ownership in the Iranian listed companies. The authors also find no convincing evidence that either the firm’s growth or financial health could influence or moderate this interrelationship. Research limitations/implications The implications drawn from this study are constrained by two primary limitations. First, the present study is conducted in an Iranian setting; therefore, the data utilized for the study only contain companies listed on the Tehran Stock Exchange. The utilization of listed companies on the Tehran Stock exchange is likely to affect the generalizability of the study in a national context. Second, the authors were unable to extend the sample time period due to some major deficiencies in the Tehran Stock Exchange library and its supplementary software. Social implications Since the fundamental institutional assumptions underpinning the western and even East Asia capital structure models are not valid in the institutional environment of Iran, the findings could provide substantial implications for our understanding of capital structures as well as debt policy literature. Originality/value This is an innovative research in terms of the mutual relationship between debt and ownership structure and the use of equations system to measure the interaction between them.