A survey on relationship between capital structure, free cash flow and diversification and firm performance of listed companies in Tehran Stock Exchange

Article history: Received May 4, 2014 Accepted 24 September 2014 Available online September 27 2014 This paper presents an empirical investigation to study the effects of free cash flow, share diversification and capital structure on Tobin-Q in selected firms on Tehran Stock Exchange. The population of the survey includes 520 firms listed on this exchange until year 2012 and the survey uses a sample of 105 firms, randomly. The study uses the models originally developed by Palepu (1985) [Palepu, K. (1985). Diversification strategy, profit performance and the entropy measure. Strategic Management Journal, 6(3), 239-255.] to measure the effects of different factors on Tobin Q. The study has indicated that while capital structure and free cash flow influence positively on Tobin Q, diversification has maintained a negative and meaningful relationship with Tobin Q. © 2014 Growing Science Ltd. All rights reserved. Capital structure Free cash flow Diversification Firm performance


Introduction
Capital structure is considered as the most important parameter affecting the valuation of corporates (Booth, et al., 2001;De Jong, 2002;Hasan & Butt, 2009;Fairfield et al., 2003).Changing and changeable environment, the credit rating companies is partly dependent on their capital structure (La Rocca et al., 2009).Fluid variables and factors affecting the capital structure can be described in terms of profitability and efficiency in target coverage, representation theory and the theory of hierarchy affect compliance (Tang & Jang, 2010;Dechow et al., 2008).Variability of stock, a uniform change in stock ownership is essential and influential factor in predicting future cash flows (Doukas & Kan, 2004).According to sources of finance, companies have different return and risk (Campa & Kedia, 2002).However, the name of the area of operations, profitability, growth opportunities, size and type of activity would be detrimental to their diverse financial needs (Gill et al., 2008).Financial performance will be somehow affected by the financial leverage ratio changes (Menéndez-Alonso, 2003).Other factors such as take over (Zhao et al., 2009), corporate governance (Wen et al., 2002, Scott Jr, 1972;Erickson & Wang, 1999), capital investment (Titman et al., 1998(Titman et al., , 2004;;Theis & Casey, 1999), intellectual capital (Tan et al. 2007;Brush et al., 2000), corporate ownership (Kapopoulos & Lazaretou, 2007;DeFond et al., 2012), information asymmetry (Coller & Yohn, 1997;Basu, 1997;Dichev & Tang, 2009) also influence on financial performance.

The proposed study
This paper presents an empirical investigation to study the relationship between capital structure, free cash flow and diversification and Tobin's Q of listed companies in Tehran Stock Exchange.The population of the survey includes 520 firms listed on this exchange until year 2012 and the survey uses a sample of 105 firms, randomly.The study uses the model originally developed by Palepu (1985) (2) where TDL, FCF, Cashflow, Sales_GR, Ad_EX represent total degree of leverage, free cash flow, cash flow, sales growth, Capital expenditures, respectively.In addition, RER, PPNE QR, and DR represent ratio of retained earnings to assets, fixed assets to total assets ratio, quick ratio and diversity ratio, respectively.Moreover, dummy_Dividend is a dummy variable, which is one if a firm pays dividend and zero, otherwise and finally, Tobin's Q is considered as dependent variable in all models.Models (1-3) are considered for testing three hypotheses as follows, 1.There is a meaningful relationship between Tobin's Q and total degree of leverage.
2. There is a meaningful relationship between Tobin's Q and free cash flow.
3. There is a meaningful relationship between Tobin's Q and share diversity.
Table 1 demonstrates the summary of some basic statistics.The preliminary results of Table 1 indicate that all data are normally distributed.However, the implementation of Kolmogorov-Smirnov test on Tobin Q yields K-S = 4.073 with Sig.= 0.000, which means the dependent variable is not normally distributed and we need to use Johnson Transformation to normalize the data, which yields K-S = 0.515 with Sig.= 0.954.Therefore, we may now use regression analysis to examine three hypotheses of the survey.Finally, we have investigation correlations among different pairs of independent variables.In our survey, we have not found any significant relationship.

The results
In this section, we present details of the implementation of regression analysis on Eq. (1) to Eq. (3).

The relationship between degree of leverage and Tobin Q
The first hypothesis of this survey investigates the relationship between degree of leverage and Tobin Q. Table 2 demonstrates the results of Chaw and Huasman.Based on the results of Table 2 we may use Panel data with fixed effect.Table 3 shows details of other necessary statistics.As we can observe from the results of generalized regression analysis (GLS), there is a meaningful relationship between TDL and Ln(Tobin's Q), (β = 0.0160 t-value = 0.2576, P-value = 0.0168).R-Square is equal to 0.4406, which means the independent variables could approximately describe 44% of the changes on dependent variable.F-value is equal to 3.6221 with p-value = 0.000, which means there is a linear relationship between independent variables and dependent variable.These results lead us to confirm the first hypothesis of the survey.

The relationship between free cash flow and Tobin Q
The second hypothesis of this survey studies the relationship between cash flow and Tobin Q. Table 4 shows the results of Chaw and Huasman.Based on the results of Table 4 we may use Panel data with fixed effect.Table 5 shows details of other necessary statistics.As we can observe from the results of generalized regression analysis (GLS), there is meaningful relationship between FCF and Ln(Tobin's Q), (β = 0.0909 t-value = 2.1031, P-value = 0.0359).R-Square is equal to 0.5597, which means the independent variables could approximately describe 56% of the changes on dependent variable.F-value is equal to 3.9129 with p-value = 0.000, which means there is a linear relationship between independent variables and dependent variable.These results lead us to confirm the second hypothesis of the survey and conclude that there was a positive and meaningful relationship between free cash flow and Tobin Q.

The relationship between share diversity and Tobin Q
The third hypothesis of this survey studies the relationship between share diversity and Tobin Q. Table 6 presents the results of Chaw and Huasman.Based on the results of Table 6 we may use Panel data with fixed effect.Table 7 shows details of other necessary statistics.As we can observe from the results of generalized regression analysis (GLS), there is a meaningful relationship between DR and Ln(Tobin's Q), (β = 0.0909 t-value = 2.1031, P-value = 0.0359).R-Square is equal to 0.7204, which means the independent variables could approximately describe 56% of the changes on dependent variable.F-value is equal to 11.8525 with p-value = 0.000, which means there is a linear relationship between independent variables and dependent variable.These results lead us to confirm the last hypothesis of the survey and conclude that there was a negative and meaningful relationship between share diversity and Tobin Q.

Conclusion
This paper presents an empirical investigation to study the effects of free cash flow, share diversification and capital structure on Tobin-Q in selected firms on Tehran Stock Exchange.The population of the survey includes 520 firms listed on this exchange until year 2012.The study has indicated that capital structure and free cash flow influenced positively on Tobin Q.In addition, diversification maintained a negative and meaningful relationship with Tobin Q. Nawaz et al. (2011) reported a positive and meaningful relationship between capital structure and Tobin Q but the results are not consistent with findings of Arslan and Karan (2007) and Ebaid et al. (2009).In addition, in terms of firm diversification, the results of our study are somewhat consistent with findings of Anderson et al. (1998), Menéndez-Alonso (2003), Rajan et al., 2000, La Rocca et al. (2009) and Chkir and Cosset (2001).
as follows,

Table 1
The summary of some basic statistics

Table 2
The summary of Chaw and Huasman tests

Table 3
The results of some statistics As we can observe from the results of Table3, all statistics are within the acceptable level and we may examine the first hypothesis based on the regression technique as follows, , ,

Table 4
The summary of Chaw and Huasman tests

Table 5
The results of some statistics As we can observe from the results of Table5, all statistics are within the acceptable level and we may examine the second hypothesis based on the regression technique as follows,

Table 6
The summary of Chaw and Huasman testsAs we can observe from the results of Table7, all statistics are within the acceptable level and we may examine the second hypothesis based on the regression technique as follows, , ,