Modeling Optimal Capital Structure Via System Dynamics Approach

Subject Areas : Business Strategy

Hamid Abdoli ¹ , Reza Tehrani ² , Amen Khadivar ³

1 - Department of Management, Faculty of Management, Tehran North Branch, Islamic Azad University, Tehran, Iran
2 - Department of Management, Faculty of Management, University of Tehran, Tehran, Iran
3 - Department of Management, Faculty of Social Sciences and Economics, Al-Zahra University, Tehran, Iran

Received: 2020-11-11 Accepted : 2021-04-18 Published : 2021-06-19

Keywords: Simulation, Firm Value, Capital Structure, System Dynamics,

Abstract :

Several theories have been presented about the corporate capital structure; some researchers believe that the structure of capital and firm value depend on each other. Moreover, others believe that the firm value is not influenced by any changes in the structure of capital, and with the change in the structure of capital, the value of the firm remains constant. The present research studies the historical theories of capital structure and presents the classification of existing theories in terms of the optimal capital structure. This classification is subdivided into two categories: the presence of an optimal capital structure and the absence of an optimal capital structure. With the historical review of theories of capital structure and the presence of an optimal capital structure or the lack of an optimal capital structure, it seems that none has been a complete model and so far, no one has been able to provide an optimal capital structure. In this research, from the system dynamics approach and using VENSIM software, the capital structure and share price of the company have been studied and the results of model simulation with real data are to ensure the correct performance of the model behavior. And the results show that financing through debt in the capital structure of the company has a significant effect on the debt cost rate and capital cost rate and does not have a significant effect on stock prices. Finally, the share price shows little sensitivity to the company's financial structure.

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