Academic journal article Iranian Journal of Management Studies

The Mediation Effect of Financial Leverage on the Relationship between Ownership Concentration and Financial Corporate Performance

Academic journal article Iranian Journal of Management Studies

The Mediation Effect of Financial Leverage on the Relationship between Ownership Concentration and Financial Corporate Performance

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

In recent years, corporate governance is recognized as a main aspect of trade dynamics and according to this issue is growing every day. The external mechanisms of corporate governance are increasingly important to minimize the conflict associated with the separation of control and ownership of companies. Whatever the share of a shareholder in the company is low, the monitoring ability of him/her to control the manager's behavior will be less. In theory, the more concentrated shareholders will focus more on monitoring and consequently reduce the opportunistic behavior of managers. Since the institutional shareholders have more access to valuable information about future prospects and long-term investments, it is expected that the firm performance with higher concentration may be better than the performance of the company with low concentration (Balsmeier & Czarnitzki, 2015; Shahveisi et al., 2016). However, some other studies show the inverse association (Fazlzadeh et al., 2011; Mashayekhi & Bazaz, 2008).

Financial leverage is one of the most difficult issues facing managers to make a decision. Financial managers must adopt methods of financing that match the type of investments and cause to increase company's value and decrease financial risk. High debt ratio in the companies could increase their financial risk and raise the cost of capital which is very important for the major shareholders and play as the fundamental factor in their decision making process. Therefore, ownership concentration may negatively affect the financial leverage. Beside, since the interests of shareholders are threatened against the company's risk, it is possible to take steps to reduce the risk including how to use excessive debt and how to change financial leverage. Accordingly, companies must optimize the use of limited resources of financing that show themselves in the form of increased profitability (Kadapakkam et al., 2016). As a result, the company's use of financial leverage could affect the company's performance.

The divergence in the previous studies may introduce a question whether ownership concentration just directly affects the financial corporate performance or an important hidden variable like financial leverage may influence such a relationship. If financial leverage is put as a hidden variable in the ownership concentration and financial corporate performance association, the financial leverage can play a substantial role in this regard. As a matter of fact, major shareholders may monitor the company more efficiently through giving more attention to financial leverage and therefore, affect the companies' performance. The prior studies have focused on the financial leverage and ownership concentration, individually. Since little research has been done in this area, the current study would like to investigate this issue and fill such a research gap in Iranian capital market.

By providing empirical evidences to market players that how financial leverage plays a role in major shareholders' decision portfolio, this study will help investors, creditors and managers in order to select appropriate and effective indicators for the evaluation and analysis of financial position and operating properly so that it leads to wealth creation for beneficiaries.

Literature Review and Theoretical Background

The research literature is presented in three parts as follows:

1. The impact of ownership concentration on corporate performance.

2. The influence of ownership concentration on financial leverage and

3. The effect of financial leverage on corporate performance.

The Impact of Ownership Concentration on Corporate

Performance

The relationship between ownership and performance has been major and the current issue of corporate governance. Many researchers find a positive correlation between ownership concentration and corporate performance (Bhattacharya & Graham, 2009; Cornett et al. …

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