Adjustment of Capital Structure Theories Using Managerial, Governmental, and Institutional Ownership in Presenting a New Model of Managed and Unmanaged Performance

Abstract

This study examines the role of earnings management in the relationship between managed and unmanaged performance, ownership structure, and capital structure. Earnings management is divided into discretionary and non-discretionary accruals in order to test classical theories of capital structure. If earnings management is absent, all influencing factors on the dependent variable become significant at the 5% level, and thus, no adjustment in the theories of capital structure and ownership structure occurs. Otherwise, theory adjustment takes place. Therefore, the main objective of this research is to adjust capital structure theories by incorporating managerial ownership, governmental ownership, and institutional ownership with regard to managed and unmanaged performance. The final statistical sample of this study consists of 173 companies listed on the Tehran Stock Exchange and the Iran Fara Bourse (IFB). The general findings are categorized into two groups: companies with low dependence on managerial ownership—i.e., companies with weak managerial ownership—and those with high dependence on managerial ownership—i.e., companies with strong managerial ownership. The results are as follows: a) Companies with weak managerial ownership: In such companies, managers, through their discretionary performance, present higher levels of managerial ownership, firm age, and paid taxes, while reporting lower levels of firm size, leverage, and risk. b) Companies with strong managerial ownership: In these companies, managers use their discretionary performance to engage in opportunistic earnings management by inflating size, taxes, age, and governmental ownership, while concealing the tangibility of assets and ownership concentration. Accordingly, this study reveals that in Iranian firms with weak managerial and governmental ownership, managers use discretionary performance to manipulate capital structure for opportunistic earnings management.