# The Effect of Managerial Myopia on the Adjustment Speed of the Company’s Financial Leverage towards the Optimal Leverage

^{1}

^{2}

^{*}

## Abstract

**:**

## 1. Introduction

## 2. Theoretical Principles of the Study

**Research**

**Hypothesis.**

#### The Empirical Background of the Research

## 3. Research Methodology

#### 3.1. Regression Model of Research

_{i,t}= β

_{0}+ β

_{1}MYO

_{i,t}+ β

_{2}STATE

_{i,t}+ β

_{3}Size

_{i,t}+ β

_{4}ROA

_{i,t}+ β

_{5}PMC

_{i,t}+ β

_{6}INST

_{i,t}+ β

_{7}Growth

_{i,t}+ β

_{8}CASH

_{i,t}+ β

_{9}BTM ratio

_{i,t}+ β

_{10}Board ind

_{i,t}+ ε

_{i,t}

#### 3.2. Operational Definitions of Research Variables

#### 3.3. The Dependent Variable of the Research: The Adjustment Speed of Financial Leverage (SL)

_{it}optimal leverage; x

_{it}is a vector of the characteristics of the i-th company at time t, which is related to the benefits and costs of activity under different leverage ratios, β′ is the estimated coefficient of this vector and u

_{it}is the error component of the model (Dang et al. 2014; Rostami et al. 2022).

_{it}is optimal leverage; SIZE, company size; EBIT, profitability; GROW, growth opportunities; EV, income volatility; AGE, company age; FA, tangible fixed assets; FIMB, fiscal deficit and u

_{it}is the error component.

_{it}= λ(L*

_{it}− L

_{it−1}) + v

_{it}

_{it}is the difference between the actual leverage of the current year and the actual leverage of the previous year; L*

_{it}, is optimal leverage; L

_{it−1}is the real leverage of the previous year; λ is the accrual rate, and v

_{it}is the one-sided error component that includes the firm unique fixed effects u

_{it}model (2) and is the error component (e

_{it}).

_{it−1}, the real leverage of the previous year.

_{it−1}from the number one, the speed of lever adjustment will be obtained (the estimated coefficient was obtained using rolling regression facilities).

#### 3.4. The Research Control Variables

## 4. Research Findings

#### 4.1. Descriptive Statistics of Research Variables

#### 4.2. Descriptive Statistics of Qualitative Research Variables

#### 4.3. Unit Root Test (Stability) of Variables

#### 4.4. Tests Related to the Classical Hypothesis of Regression

#### 4.5. The Result of the Research Hypothesis Test

## 5. Conclusions

#### 5.1. Discussion and Suggestions

#### 5.2. Research Limitations

## Author Contributions

## Funding

## Data Availability Statement

## Acknowledgments

## Conflicts of Interest

## References

- Abarbanell, Jeffery, and Victor Bernard. 2000. Is the U.S stock market myopic? Journal of Accounting Research 38: 221–42. [Google Scholar] [CrossRef]
- Akbari, Farzana, Mahdi Salehi, and Mohammad Ali Bagherpour Vlashani. 2019. The relationship between tax avoidance and firm value with income smoothing: A comparison between classical and Bayesian econometric in multilevel models. International Journal of Organizational Analysis 27: 125–48. [Google Scholar] [CrossRef]
- Almaleki, Mohammad, Mahdi Salehi, and Mahdi Moradi. 2021. The relationship between narcissism, managerial overconfidence and comparability of financial statements of listed companies. Journal of Facilities Management 19: 681–700. [Google Scholar] [CrossRef]
- An, Zhe, Chen Chen, Donghui Li, and Chao Yin. 2021. Foreign institutional ownership and the speed of leverage adjustment: International evidence. Journal of Corporate Finance 6: 101966. [Google Scholar] [CrossRef]
- Anderson, Theodore Wilbur, and Cheng Hsiao. 1982. Formulationand Estimation of Dynamic Models Using Panel Data. Journal of Econometrics 18: 47–82. [Google Scholar] [CrossRef]
- Arianpoor, Arash, and Niloufar Mehrfard. 2022. The impact of managerial attributes on cash holding and investment efficiency and the mediator role of cash holding. Journal of Islamic Accounting and Business Research. ahead-of-print. [Google Scholar] [CrossRef]
- Arikawa, Yasuhiro, and Hanh Nguyen Hoang. 2022. Capital Structure Adjustment in Emerging Markets: Evidence from Vietnam. Working Paper, Tokyo, Japan. Available online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4009437 (accessed on 1 December 2022).
- Assadi, Hossein, Elnaz Tajvidi, and Soheil Esmaeel Pour. 2021. The impact of financial position and industry characteristics on adjustment speed of capital structure. Journal of Investment Knowledge 10: 1–21. (In Persian). [Google Scholar]
- Chang, Ya-Kai, Robin K. Chou, and Tai-Hsin Huang. 2014. Corporate governance and the dynamics of capital structure: New evidence. Journal of Banking and Finance 48: 374–85. [Google Scholar] [CrossRef]
- Chen, Yu-Fen, Fu-Lai Lin, and Sheng-Yung Yang. 2015. Does institutional short-termism matter with managerial myopia? Journal of Business Research 68: 845–50. [Google Scholar] [CrossRef]
- Chintrakarn, Pandej, Pornsit Jiraporn, Sameh Sakr, and Sang Mook Lee. 2016. Do co-opted directors mitigate managerial myopia? Evidence from R&D investments. Finance Research Letters 17: 285–89. [Google Scholar] [CrossRef]
- Daliri, Javad, Farzin Rezaei, and Fazel Mohammadi Nodeh. 2020. Investigating the Impact of Managers’ Lake of Foresight on Socioeconomic Components of Sustainability Performance Report. Scientific Research Quarterly. Journal of Management Accounting and Auditing 9: 19–40. (In Persian). [Google Scholar]
- Dang, Viet Anh, Minjoo Kim, and Yongcheol Shin. 2014. Asymmetric adjustment toward optimal capital structure: Evidence from a crisis. International Review of Financial Analysis 33: 226–42. [Google Scholar] [CrossRef]
- Do, Trung K., Henry Hongren Huang, and Puman Ouyang. 2022. Product market threats and leverage adjustments. Journal of Banking & Finance 135: 106365. [Google Scholar] [CrossRef]
- Faccio, Mara, Maria-Teresa Marchica, and Roberto Mura. 2016. CEO gender, corporate risk-taking, and the efficiency of capital allocation. Journal of Corporate Finance 39: 193–209. [Google Scholar] [CrossRef] [Green Version]
- Fama, Eugene F., and Kenneth R. French. 2002. Testing Trade-Off and Pecking Order Predictions About Dividends and Debt. The Review of Financial Studies 15: 1–33. [Google Scholar] [CrossRef]
- Faysal, Saad, Mahdi Salehi, and Mahdi Moradi. 2020. The impact of ownership structure on the cost of equity in emerging markets. Management Research Review 43: 1221–39. [Google Scholar] [CrossRef]
- Fitzgerald, James, and John Ryan. 2019. The impact of firm characteristics on speed of adjustment to target leverage: A UK study. Applied Economics 51: 315–27. [Google Scholar] [CrossRef]
- Flannery, Mark J., and Kasturi P. Rangan. 2006. Partial adjustment toward target capital structures. Journal of Financial Economics 79: 469–506. [Google Scholar] [CrossRef]
- Kieschnick, Robert, and Rabih Moussawi. 2018. Firm age, corporate governance, and capital structure choices. Journal of Corporate Finance 48: 597–614. [Google Scholar] [CrossRef]
- Mohammadi, Mohammad, Behzad Kardan, and Mahdi Salehi. 2018. The relationship between cash holdings, investment opportunities and financial constraint with audit fees. Asian Journal of Accounting Research 3: 15–27. [Google Scholar] [CrossRef] [Green Version]
- Moradi, Javad, and Hadi Bagheri. 2014. A comparative investigation into the Effects of Management Myopia and Earnings Management on Stock Return. Accounting and Auditing Reviews 21: 229–50. (In Persian). [Google Scholar]
- Moradi, Mahdi, and Esmat Parhizkar Malek Abad. 2021. Effects of Inflation Rate Risk and Firm-Specific Risk on A Firm Capital Structure Adjustment: GMM Approach. Empirical Research in Accounting 11: 23–52. [Google Scholar]
- Moradi, Mehdi, Mohammad Ali Bagherpour, and Ahmad Ahmadi. 2016. Analysis of myopia phenomenon in Iran stock market by using a Clean Surplus Accounting Based Model. Journal of Management Accounting and Auditing Knowledge 5: 55–62. (In Persian). [Google Scholar]
- Morais, Flávio, Zélia Serrasqueiro, and Joaquim JS Ramalho. 2022. Capital structure speed of adjustment heterogeneity across zero leverage and leveraged European firms. Research in International Business and Finance 62: 101682. [Google Scholar] [CrossRef]
- Naseem, Muhammad Akram, Jun Lin, Ramiz ur Rehman, Muhammad Ishfaq Ahmad, and Rizwan Ali. 2019. Does capital structure mediate the link between CEO characteristics and firm performance? Management Decision 58: 164–81. [Google Scholar] [CrossRef]
- Nazemi Ardakani, Mehdi, and Amir Hossein Zare. 2015. Investigating the effect of corporate governance on the speed of capital structure adjustment using the generalized torque method. Publication: Perspective of Financial Management 6: 43–59. (In Persian). [Google Scholar]
- Oino, Isaiah, and Ben Ukaegbu. 2015. The impact of profitability on capital structure and speed of adjustment: An empirical examination of selected firms in Nigerian Stock Exchange. Research in International Business and Finance 35: 111–21. [Google Scholar] [CrossRef] [Green Version]
- Öztekin, Özde. 2015. Capital structure decisions around the world: Which factors are reliably important? Journal of Financial and Quantitative Analysis 50: 301–23. [Google Scholar] [CrossRef] [Green Version]
- Rostami, Wahab, Mehdi Mehravar, and Hamed Kargar. 2022. The Effect of Risk management on The Speed of adjusting financial leverage In The Life cycle stages Of Companies. Advances in Shiraz University Accounting 14: 1–22. (In Persian). [Google Scholar]
- Salehi, Mahdi, and Fatemeh Ghasempour. 2021. Material internal control weakness with intangible assets, capital structure and commercial risk. Management Research Review 44: 1059–82. [Google Scholar] [CrossRef]
- Salehi, Mahdi, and Grzegorz Zimon. 2021. The Effect of Intellectual Capital and Board Characteristics on Value Creation and Growth. Sustainability 13: 7436. [Google Scholar] [CrossRef]
- Salehi, Mahdi, Grzegorz Zimon, Hayder Adnan Hashim, Ryszard Jędrzejczak, and Adam Sadowski. 2022. Accounting Quality and Audit Attributes on the Stock Price Crashes in an Emerging Market. Risks 10: 195. [Google Scholar] [CrossRef]
- Salehi, Mahdi, Mehdi Behname, and Mohammad Sadegh Adibian. 2021. Structural shocks in monetary policy, exchange rates, and stock prices using SVAR in Iran. International Journal of Islamic and Middle Eastern Finance and Management 14: 908–27. [Google Scholar] [CrossRef]
- Seifzadeh, Maryam, Mahdi Salehi, Bizhan Abedini, and Mohammad Hossien Ranjbar. 2021. The relationship between management characteristics and financial statement readability. EuroMed Journal of Business 16: 108–26. [Google Scholar] [CrossRef]
- Seifzadeh, Maryam, Mahdi Salehi, Mohammadhamed Khanmohammadi, and Bizhan Abedini. 2022. The relationship between management attributes and accounting comparability. Journal of Facilities Management 20: 1–18. [Google Scholar] [CrossRef]
- Tehrani, Reza, and Afsaneh Delshad. 2018. Investigation of Managerial Myopia on Future Financial Performance in Companies Listed on Tehran Stock Exchange. Journal of Accounting and Social Interests 8: 24–46. (In Persian). [Google Scholar]
- Vo, Thuy Anh, Mieszko Mazur, and An Thai. 2021. The impact of COVID-19 economic crisis on the speed of adjustment toward target leverage ratio: An international analysis. Finance Research Letters 8: 102157. [Google Scholar] [CrossRef]
- Zahedi, Javad, Mahdi Salehi, and Mahdi Moradi. 2022. Identifying and classifying the contributing factors to financial resilience. Foresight 24: 177–94. [Google Scholar] [CrossRef]
- Zimon, Grzegorz, Arash Arianpoor, and Mahdi Salehi. 2022. Sustainability Reporting and Corporate Reputation: The Moderating Effect of CEO Opportunistic Behavior. Sustainability 14: 1257. [Google Scholar] [CrossRef]

Group 1 | Group 2 | Group 3 | Group 4 |
---|---|---|---|

The difference in return on assets | The difference in return on assets | The difference in return on assets | The difference in return on assets |

Predicted with positive real | Predicted with positive real | Predicted with positive real returns | Predicted with negative real |

The difference in marketing and research and development costs | Only the difference of one between negative marketing or research and development costs | The difference in marketing and research and development costs | - |

Variable | Sign | Mean | Maximum | Minimum | Standard Deviation | Kurtosis | Skewness |
---|---|---|---|---|---|---|---|

Leverage adjustment speed | SL | 0.530 | 0.980 | 0.004 | 0.260 | −0.260 | 2.110 |

Liquidity ratio | Cash | 0.120 | 0.510 | −0.120 | 0.130 | 0.750 | 3.580 |

Board independence | Board ind | 0.650 | 1.000 | 0.000 | 0.170 | −0.210 | 3.090 |

Firm growth | BTM ratio | 5.650 | 15.870 | 1.000 | 4.790 | 1.080 | 2.870 |

Sales growth | Growth | 0.290 | 1.320 | −0.390 | 0.380 | 0.740 | 3.430 |

Institutional ownership | INST | 60.280 | 98.110 | 0.000 | 30.840 | −0.850 | 2.400 |

Product market competition | PMC | 0.0750 | 0.980 | 0.000 | 0.210 | 3.510 | 14.280 |

Return on assets | ROA | 0.130 | 0.590 | −0.170 | 0.140 | 0.760 | 3.620 |

Firm size | SIZE | 14.480 | 19.770 | 11.030 | 1.490 | 0.870 | 4.200 |

Variable | Sign | Description | Frequency | Frequency Percentage |
---|---|---|---|---|

Myopic managers | MYO | 1 | 441 | 35.560 |

Non-myopic managers | MYO | 0 | 799 | 64.440 |

Companies with political connections | STATE | 1 | 503 | 40.560 |

Companies without political connections | STATE | 0 | 737 | 59.440 |

Total | - | - | 1240 | 100 |

Variable | Sign | Mean | Maximum | Results |
---|---|---|---|---|

Leverage adjustment speed | SL | −13.906 | 0.000 | Stationary |

Liquidity ratio | Cash | −17.102 | 0.000 | Stationary |

Board Independence | Board ind | −10.083 | 0.000 | Stationary |

Firm growth | BTM ratio | −13.837 | 0.000 | Stationary |

Sales growth | Growth | −14.563 | 0.000 | Stationary |

Institutional ownership | INST | −13.458 | 0.000 | Stationary |

Product market competition | PMC | −75.024 | 0.000 | Stationary |

Return on assets | ROA | −12.980 | 0.000 | Stationary |

Firm size | SIZE | −14.633 | 0.000 | Stationary |

Test | Test Statistic | Significance Level | Test Result |
---|---|---|---|

F. Limer | 1.840 | 0.000 | Admitting panel data pattern |

Hausman | 27.763 | 0.002 | Fixed effects of intercept |

White’s test | 159.710 | 0.000 | Existence of heterogeneity of variance |

Breusch-Godfrey test | 22.169 | 0.000 | The existence of serial autocorrelation |

Normalization of model residuals | 35.788 | 0.000 | no normal distribution |

SL_{i,t} = β_{0} + β_{1} MYO_{i,t} + β_{2} STATE_{i,t} + β_{3} Size_{i,t} + β_{4} ROA_{i,t} + β_{5} PMC_{i,t} + β_{6} INST_{i,t} + β_{7} Growth_{i,t} +β _{8} CASH_{i,t} + β_{9} BTM ratio_{i,t} + β_{10} Board ind_{i,t} + ε_{i,t} | ||||||

Dependent Variable: Adjustment Speed of Financial Leverage | ||||||

Variables | Sing | Coefficient | Standard Error | t Statistic | Significance | VIF |

Managerial myopia | MYO | −0.030 | 0.010 | −3.060 | 0.002 | 1.150 |

Political relation | STATE | 0.009 | 0.009 | 0.980 | 0.320 | 1.160 |

Firm | SIZE | −0.002 | 0.003 | −0.780 | 0.430 | 1.200 |

Return on assets | ROA | 0.410 | 0.040 | 10.040 | 0.000 | 1.630 |

Product market competition | PMC | 0.067 | 0.019 | 3.430 | 0.000 | 1.020 |

Institutional ownership | INST | −0.000 | 0.000 | −5.780 | 0.000 | 1.220 |

Sales growth | Growth | −0.032 | 0.015 | −2.090 | 0.036 | 1.360 |

Liquidity ratio | Cash | −0.020 | 0.035 | −0.570 | 0.560 | 1.380 |

Firm growth | BTM ratio | −0.005 | 0.001 | −3.600 | 0.000 | 1.100 |

Board independence | Board ind | 0.019 | 0.023 | 0.820 | 0.410 | 1.040 |

Intercept | 0.600 | 0.054 | 11.130 | 0.000 | - | |

The adjusted coefficient of determination | 0.300 | |||||

Durbin-Watson | 2.280 | |||||

F statistic | 3.615 | |||||

Significance level | 0.000 |

Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. |

© 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).

## Share and Cite

**MDPI and ACS Style**

Rostami, V.; Kargar, H.; Samimifard, M.
The Effect of Managerial Myopia on the Adjustment Speed of the Company’s Financial Leverage towards the Optimal Leverage. *J. Risk Financial Manag.* **2022**, *15*, 581.
https://doi.org/10.3390/jrfm15120581

**AMA Style**

Rostami V, Kargar H, Samimifard M.
The Effect of Managerial Myopia on the Adjustment Speed of the Company’s Financial Leverage towards the Optimal Leverage. *Journal of Risk and Financial Management*. 2022; 15(12):581.
https://doi.org/10.3390/jrfm15120581

**Chicago/Turabian Style**

Rostami, Vahab, Hamed Kargar, and Mahdis Samimifard.
2022. "The Effect of Managerial Myopia on the Adjustment Speed of the Company’s Financial Leverage towards the Optimal Leverage" *Journal of Risk and Financial Management* 15, no. 12: 581.
https://doi.org/10.3390/jrfm15120581