Investigating the Relationship between Financial Growth and Strength with Leverage Ratios of Companies Listed inTehran Stock Exchange

Abstract

The aim of this study is to investigate the relationship between financial growth and strength with leverage ratios of companies listed in Tehran Stock Exchange. Sales growth, profit growth, and financial strength as independent variables and leverage ratio was used as dependent variable. four different ratios were used to assess the company's financial leverage. Financial strength has been measured by Altman bankruptcy model.

Data related to 102 companies listed in Tehran Stock Exchangefor the period 2002-2011 have been used as sample totest the hypotheses and examine the effect of independent variables and and leverage ratio. Data were analyzed by combined data analysis. panel data test were used to estimate the suitable models of hypotheses test in combined data.

The results indicate a correlation between sales growth, profit growth, asset growth and financial strength with a total debt leverage ratio and the model can be used to measure the relationship. In model of total debt ratio, there is negative and reverse relationship between the growth variables and financial strength with leverage ratios, i.e. increasing and improving financial growth and strength will reduce debt ratio and ultimately the company's financial leverage. Results of this research can be used by financial analysts and other users of financial information in their decisions making.