The Effect of Free Cash Flow and Capital Structure on Different Criteria for Evaluating the Performance of the Material Industry and Pharmaceutical Products Companies Listed on the Tehran Stock Exchange

Document Type : Original Article

Authors

1 Assistant Professor, Department of Accounting, Tarbiat Modares University

2 M. A. Student in Accounting, Tarbiat Modares University

3 M. A. Student in Accounting, Islamic Azad University, Noor Branch

Abstract

Introduction: In the world today, regarding the competitive market conditions, it is necessary to determine an appropriate method for financing in order to increase profitability and corporate survival. Also, investors analyze performance of the company and capital structure according to the separation of ownership from management to have a good investment.
Method: The present study has examined the relationship between free cash flow and capital structure with the performance of the material industry and pharmaceutical products companies. Hence, 20 active companies which are listed on the Tehran Stock Exchange in this industry have been investigated from 2008 to 2013. In order to test the hypotheses of the research, the model of Panel data and software Eviews version 7 were used.
Results: Data analysis indicated that the relationship between the debt leverage with Tobin's Q index and return on equity is significant and positive, but it has a significant and negative relation with return of assets. Moreover, the relationship between free cash flow and return of assets is significant and negative, and it has a significant and positive relation with return on equity. However, it does not have any significant relationship with Tobin's Q index.
Conclusion: The results of research showed that the pharmaceutical companies can raise return on equity by increasing debt leverage and free cash flow. Also, return of assets can be reduced through increasing debt leverage and free cash flow. Besides, Tobin's Q index will be raised by increasing debt leverage; nevertheless, increasing in free cash flow has no effect on Tobin's Q index.

Keywords

References

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