Investigate the relationship between working capital management and agency costs for firms listed in Tehran Stock Exchange

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1 : Investigate the relationship between working capital management and agency costs for firms listed in Tehran Stock Exchange Shahrzad Emrani, Dr. Hasan Hemati Department of Accounting, Science and Research Branch, Islamic Azad University, saveh, Iran PhD in Accounting and faculty member at University of Ghazvin univercity Abstract direct relationship is established The purpose of this study was to evaluate the effect of working capital management on the agency costs of listed companies in Tehran Stock Exchange The question is: Do different types of working capital management company representing the amount of money they have influence Which are the types of working capital management on behalf lesser cost effective? Agency costs may adversely affect the company's value In the present investigation agency costs as a function of the interaction between the company's growth opportunities and free cash flow is defined and the Tobin Q index, as a measure is used to measure growth opportunities For this purpose, the data of 127 firms listed in Tehran Stock Exchange during the period has been adopted. Research hypotheses using multiple regression analysis and correlation are discussed. Our findings suggest that the costs of debt collection agency, there is no statistically significant relationship between the payment of debts and expenses represent a significant Keywords: agency costs, working capital, receivables collection period, the debt 1. Introduction Working capital is defined as current assets and the company s net working capital, defined as current assets minus the current liabilities. As a measure used to measure the company's liquidity. No matter how much the company is high, the liquidity is high. With regard to the management of assets and liabilities is important in enterprises as well as the difficulties regarding financing them, the researchers sought to examine this issue.the overall goal of this research study researcher working capital management and its relationship with agency costs and reduce costs. 2. Problem Statement The main objective of this study was to investigate the impact of working capital management on behalf Costs of listed companies in Tehran Stock Exchange. Working capital management is one of the most important functions of financial management, which plays an important role in achieving the objectives, policies and achievements of the company When decisions, particularly in the areas of financial management and working capital management is adopted, its level is determined by the company. And theoretical study of financial management in relation to increasing the overall value of the company is done. Management of working capital, current assets and current liabilities are more involved in the organization and is considered part of capital budgeting in the form of short-term corporate planning fits. Currently one of the most important issues in financial management, working capital management discussion that focuses on the management of various assets and current liabilities For efficient and effective working capital management of a firm, predictable and secure cash required as a target In general, management of working capital means that cash, accounts receivable and inventory to be maintained at a level that can pay the bills for short-term and current liabilities are adequate movement. Using net working capital firm can afford the repayments of short-term debt can be predicted. 103

2 Costs represent the interests of owners and managers of non-alignment and the resulting separation of ownership and control are created. Problem is the urging delegates to take decisions that would maximize welfare owner (s) are. Relationship formation, agency, agency costs due to a conflict of interest arises between the parties.agency costs adversely affect the value of the firm is now looking to control and reduce such costs is. The purpose of this study is that the relationship between measures of working capital management agencies to determine what costs and find out which of these measures is to reduce the costs of company representatives as a result of increasing corporate value.the ultimate goal of any company is to be used in a way that increases its value. Therefore, in this study we are trying to find a way to introduce it to the company managers to assist them in reducing agency costs. In this study, we have investigated the relationship between working capital management and representation expenses. Relationship formation, agency, agency costs arising from conflicts of interest between the parties is created. Costs represent an adverse effect on the value of their companies and companies looking to control and reduce these costs. In this case, there are a few basic questions, including: The main research question is: Is there a relationship between working capital management and agency cost? 1. Is there a significant relationship between the company's collection agency costs? 2. Is there a significant relationship between the Company has paid the debt and agency cost? 3.The importance and necessity Agency costs have an adverse effect on firm value, if the market value of the firm is expected that costs will be reduced.there are different kinds of working capital management can reduce agency costs and negative effects on firm value may help. Agency costs will lead to increased value of the company, hence the choice of the impact of working capital Management Company on behalf of the costs to increase corporate value is the result shareholders and other stakeholders benefit. 4.Research hypotheses 4.1.The main hypothesis: There is a relationship between working capital management and representation expenses. 4.2.The first sub-hypothesis: the duration and the cost of debt collection company representing a significant relationship exists. 4.3.The second sub-hypothesis: the payment of debts and expenses of the company represented a significant relationship exists. 5. Background research Teruel and Solano (2006) during the years 2000 to 2005 to study the working capital management and profitability of small and medium companies have been Spanish. During this study, they found that working capital management policies of any company depends on the manager's part. Managers can adopt different policies in working capital levels, liquidity and profitability are affected and to determine the value of the company Rheman and Mohammad Naser (2007) in their study of the relationship between working capital management and profitability of the company's liquidity examined., In this study, the cash conversion cycle, cycle inventory, deposit the creditors, collection period, this ratio, net operating income, firm size, debt ratio and the ratio of financial assets, was used. Faris (2011) Working capital financing decision does not provide extensive details. This is perhaps due to the short-term investment and finance are considered. But the details of financial management decisions are extremely helpful. In this study, the relationship between working capital review conservative and strong 104

3 profitability. In a sample of 56 specimens in this study between 2004 and 2008 on the stock exchange is done. The results showed that the negative relationship between profitability and working capital as a conservative investment, and there are fiscal policy. Actually significant relationship between current assets and current liabilities on the company's financial and operational risks, there is no. Muhammad Safdar (2012), the relationship between working capital management and profitability of manufacturing companies in Pakistan was studied. The results show a strong negative relationship between the variables of working capital management and corporate profitability there. This means that as the cash conversion cycle increases it will lead to a reduction in the company's profitability. Elena Rshaly (2012 ) Factors affecting working capital management approach to research that examines the methodological approach in the study of 211 companies in the Athens Stock Exchange for a period of six years from 2005 to 2010 have been mentioned. The present study aims to investigate the effects of working capital management for the Greek enterprises through the examination of the profits (gross operating profit), the performance ( return on assets ) and market value (Q Tobin ). The results of the study showed a significant negative correlation between the variables of working capital and business performance there Seriana (2013) studied the relationship between working capital firms, private companies and the government to investigate the situation. Research findings show that private companies have the cash conversion cycle is slower than public companies.results show that the cash conversion cycle (negative) impact on profitability in a relatively strong private company than public companies. This shows that the efficiency of working capital for firms with access to external finance is bounded. Lee (2013), this study examines the relationship between state and liquidity management and shareholders can apply on behalf of the agency cost, it pays. The results of the research findings indicate that the positive relationship between government and agency fees apply when there is liquidity. In this regard, the rewards, control, monitoring, shareholder representation on the board is used for cost containment. Hassanpour (2009), to study the effect of working capital strategy focuses on stock returns. The overall strategy of working capital management is divided into three categories: 1. Conservative strategy, 2. bold strategy, 3. Moderate strategy.using the screening method 62 companies from 9 Sector 20 during the season will be reviewed. Results of hypothesis testing shows that the average yield different strategies differ significantly strategy and daring highest returns among a mong other strategies in the industry. Seyed Ali Mirtoni (2009), based on the separation of operational and corporate financial policy analysis, working capital management, manufacturing companies listed in Tehran Stock Exchange for the period 1383 to 1387 did.in this study the influence of different environmental factors and internal components of working capital included on the Company's net cash investment and the flow required studied. This study proposed the model of " separation of operational and financial policies of the company" to pursue a policy issue that cannot be told in bold or conservative Operating Profit Margin and the issues of the company's vision to the issues of financing can be different. Corporate financial policies may be bold but do not act boldly in the operational policy. The results of the study can be seen to some extent separate policies. Manufacturing companies have been aggressive fiscal policy in general and the operational policy is conservative The results of this study, which represents a net cash balance of corporate financial policy has been the lowest in And the working capital requirements of the operational policies indicate they are at their highest. eizadinia and Taki (2010 ) argue that the full development of the project and working capital management, can effectively contribute to the creation of corporate value, has. This paper aims to provide empirical evidence about the impact of working capital management on the viability of Iranian companies with a sample size is small or large. The data collected in this study, the financial statements of listed companies in Tehran Stock Exchange for the period 2002 to 2008 is taken. Dependent variable is the return on total assets as a measure of the ability to measure profitability is considered The regression results show a negative relationship between cash conversion cycle and return on assets has led to significant investment in inventory and accounts receivable may be leading to lower profitability. 6.Agency cost: Q*FCF: Growth opportunities measured by Tobin's Q. Q-Tobin: Is the sum of market value of equity and book value of total debt to total book value of total assets. 105

4 QI: Operating Profit Div: Dividends approved, D: Amortization expense of intangible and tangible fixed assets, T: Cost of Revenue I: Funding, TA: Total assets, FCF: Free cash flow. 7. Working Capital: Collection period: Average number of days that the company has received demands from customers. Payment of Debts: Average number of days the company will pay its debts. 8. Company Growth Company growth: the ratio of market value of equity to book value of equity is calculated. 9. Return Company The company's return on the stock is derived. 10. Company size Firm size is the logarithm of assets 11. Sample Companies that have not provided the information needed to calculate the variables of the study, the research community and ultimately the removal of a sample of 127 companies, and a knockout studies investigating the manner to a 6-year have been selected. Thus, the final sample size of 762 years - is now being used as a data fusion in hypothesis testing. (Listed in the Appendix are examples of companies). 12. Statistical model In this study, to analyze the raw data and convert it to the information needed to test the hypothesis of partial least-squares regression was used. These tests are performed by statistical software SPSS16 and panel data The first sub-hypothesis testing approach AGENCY i,t=β 0 +β 1 AR i,t +β 2 Ret i,t-1 +β 3 Cash i,t +β 4 Size i,t +β 5 GROW i,t + i,t The second sub-hypothesis testing approach AGENCY i,t=β 0 +β 1 AP i,t +β 2 Ret i,t-1 +β 3 Cash i,t +β 4 Size i,t +β 5 GROW i,t + i,t 106

5 13. Check the normality of the variable (s) associated Regression model to test the hypothesis, the variable costs as the dependent variable representation has been proposed. Model test research hypotheses based on regression equations and the normality of the dependent variable is based on the fundamental assumptions of normality of the residuals of the regression analysis as well as fashion. In this research the data normality test of Kolmogorov - Smirnov test was used. Statistical assumptions of the test are as follows. H 0 : the data distribution is normal. H 1 : the data distribution is not normal. The results of these tests are given in Table 1. Table 1: Test for normality of dependent variable Dependent variable k-s The test statistic d.f p-value Agency costs 0/ /095 According to the results in Table 4-2, the significance level of the test, Kolmogorov - Smirnov test for the dependent variable, rather than the experimental error (0.05 = α) and the hypothesis H 0 is accepted. In other words, the data on the dependent variable follows a normal distribution and a distribution close to normal as one of the basic assumptions of regression on this variable is accepted The first sub-hypothesis test results The first research hypothesis predicted that there is a relationship between the collection and representation expenses. To test this hypothesis, a regression model in which the costs of collection and represent a function of the control variables are used. The results of the regression model are given in Table 2. Table 2: Results of statistical analysis to test the first hypothesis AGENCY i,t=β 0 +β 1 AR i,t +β 2 Ret i,t-1 +β 3 Cash i,t +β 4 Size i,t +β 5 GROW i,t + i,t R 2 Adjusted D.W statistic statistic F p-value F Variable coefficient β Standardized t.statistic (P-value) constant AR Ret Cash Size GROW Statistical analysis of the validity of the regression model in the first part of Table 4-3. Coefficient of determination regression model is indicated that this model has managed 29.2 % of the sample firms represent changes in costs through independent and control variables to account for. Also, the results show that Watson statistic camera between 1.5 to 2.5 and therefore, there is a strong correlation between the errors of the regression model and its lack of correlation between the errors, as one of the basic assumptions of the regression model fitted, is accepted. Regression, analysis of variance (ANOVA), which based its decision on the F-statistic for the hypothesis test model was fitted in the first two columns of Table 4.3 are minor. Statistical assumptions of the F-statistic analysis is as follows H 0 : β i = 0 regression model is not significant. H 1 : β i 0 regression model is significant. 107

6 F-statistic for the model error level of less than significant level exam (0.05 = α), and hence the H0 hypothesis is rejected and a significant regression to estimate relationships between variables, is linear. Statistical analysis for each of the independent variables and control model in the second part of the first hypothesis are presented in Table 4-3. The estimated coefficient for the AR variable costs related to the debt collection agency shows, sort and a significance level of 0.946, which is higher than the 0.05 (test error) is. These findings suggest that contrary to the claims of the theory, there is no significant relationship between these variables. Regarding the control variables, the results indicate that the variable costs of liquidity and the growth rate of sales represent a significant direct relationship is established. In other words, agency costs in firms with higher liquidity and higher sales growth rate is higher than other companies. Based on the results presented in Table 4-3, the following regression model results can be expected.agency i,t= Cash i,t GROW i,t + i,t Overall, the results showed that the costs of debt collection agency, there is no statistically significant relationship. This finding is consistent with claims in the first hypothesis; the hypothesis is rejected at the 95% confidence level The second sub-hypothesis test results: The second hypothesis of the study predicted that there is a relationship between the agency costs of debt. To test this hypothesis, a regression model in which the agency costs of debt and function of control variables are used. The results of the regression model are given in Table 4-4 : Table 3- Results of statistical analysis to test the hypothesis AGENCY i,t=β 0 +β 1 AP i,t +β 2 Ret i,t-1 +β 3 Cash i,t +β 4 Size i,t +β 5 GROW i,t + i,t R 2 adjaste D.W statistic Statistic F pvalue Variable coefficient β Standardized Statistic t P-value Constant AP Ret Cash Size GROW Statistical analysis of the validity of the regression model in the first part of Table 4-4. Coefficient of determination regression model is indicated that this model has managed 2.31% of the sample firms represent changes in costs through independent and control variables to account for. Also, the results show that Watson statistic camera between 1.5 to 2.5 and therefore, there is a strong correlation between the errors of the regression model and its lack of correlation between the errors, as one of the basic assumptions of the regression model fitted, is accepted. F-statistic for the model error level of less than significant level exam (0.05 = α), and hence significant regression to estimate relationships between variables, is linear. The estimated coefficient for the variable representing the AP that the relationship of debt and the costs of the show, sort of 0.04 with a significance level of 0.023, which is less than 0.05 (test error) is. These findings suggest a significant correlation between the variables representing the cost of debt. In other words, companies that pay period longer have to bear higher agency costs. 108

7 Regarding the control variables, the results indicate that the variable costs of liquidity and the growth rate of sales represent a significant direct relationship is established. In other words, agency costs in firms with higher liquidity and higher sales growth rate is higher than other companies. Based on the results presented in Table 4-4, the following regression model results can be expected. AGENCY i,t= ap Cash i,t GROW i,t + i,t Overall, the results showed that the costs of debt payments represent a significant direct relationship is established. This finding is consistent with the claims raised in the second hypothesis and the hypothesis is rejected at the 95% confidence level. Table 4: Summary of results of testing hypotheses independent variable Significance Summary of hypotheses Results coefficient test There is a relationship between the Reject the hypothesis collection and representation expenses. There is a relationship between the agency costs of debt payments Acceptance of the hypothesis Overall, the findings show that the cost of working capital management agency relationship exists. Accordingly, the agency costs of debt payments, there is a significant inverse relationship. However, the relationship between inventories and the cash conversion cycle, direct and significant. 14. Conclusions: The first hypothesis tests and interprets the results The first hypothesis test results showed that the costs of debt collection agency, there is no statistically significant relationship. The results of theoretical investigations and claims are inconsistent with the first hypothesis (no relation). Also, the findings of the first research hypothesis, Fathi (2009) and Nubani and Alhajr (2010) is inconsistent. Because the researchers found that the collection of performance criteria there are forprofit entities. In this regard, Nubani and Alhajr (2010 ) suggested that the structure of the interest groups involved in working capital management, profit Units influences and contributes to the costs of adjustment are represented The second hypothesis tests and interprets the results The second hypothesis test results showed that the payment of debts and expenses represent a significant, direct relationship. The findings of the theoretical research and the second hypothesis are consistent with the claims. Also, the findings of this study, Fathi (1388) and Nobani and Alhajr (2010) is consistent. In this regard, it appears that the samples firms manage the debt payment period as a function of working capital management in dealing with creditors have responded.in fact, it can be stated that the effect of this on working capital management Profit entities by reducing financial restrictions and increasing their access to financial resources and summary of financial flexibility (Ding et al, 2011). The optimal management of working capital is the debt payment period longer be possible. This will benefit both investors and owners to be profitable. Firstly, the availability of financial resources to take advantage of opportunities to invest in projects with positive net present value increases. Consequently the Company's working capital efficient manner used to increase efficiency. Secondly, the existence of funds, profit units significantly reduces the cost of financing them. 15. Recommendations for future research 109

8 Examines the relationship between cash holdings and investment opportunities with delegates costs. Hypothesis One: There is a relationship between the residual cash cost to company representatives. Second hypothesis: the remaining costs of investment opportunities with representatives of the companies are related. The relationship between capital structure and financing costs represent costs of firms (Hypothesis One: There is a relationship between capital structure and corporate agency costs.second hypothesis: the financing costs represent costs associated companies there. Examine the reaction of investors to the company's cash holdings and the amount of working capital (Hypothesis I: Investors react to the level of corporate cash holdings. Second hypothesis: investors react to the amount of capital companies. References Abdul race Razloqi, Hope, 2007, "Evaluation of the correlation between working capital strategies and stock returns," Master's thesis, Faculty of Management, Tehran University. Abdul Rahman &Mohamed Nasr, (2007), Working capital Management and Profitability, International Review of Business Research Papers Anand,M.&A.,Gupta, Working capital performance of corporate India, Working Paper, SSRN Electronic Library Arrested, M., 2005, "Fundamentals of Financial Management", Volume I, Publications in new, second edition, Chapter V, pp Azar, A. and M. Momeni, 1998, "Application of Statistics and Management", Volume II, published by side. Baltagi, B. H. (2005), "Econometric Analysis Of Panel Data". John Wiley and Sons Inc, 3rd Edition, New York USA. Deloof. M. (2005), Dose Working Capital Management Affect Profitability of Belgian Firms?, Journal of Business,Finance and Accounting30, Denis, Diane K. and McConnell, John J.,(2003), "International CorporateGovernance",ECGI Finance Working Paper; and Tuck-JQFAContemporary Corporate Governance Issues II Conference.No.05/2003. Ding.S, Guariglia.A, and Knight.J(2011). Investment and financing constraints in China: does working capital management make a difference? Electronic copy available at: Dirt, G., 1996, "the dissertation research approach", publisher reflection, Eighth Edition, pp Fathi, S. (1388) examined the relationship between working capital management and firm financial performance, business review Issue 36, August, and Persian date Shahrivar 88, pp Fazzari, S. and B. Petersen (2010). Working capital and fixed investment: new evidence on financing constraints. The RAND Journal of Economics, 24, Fazzari. S. M. and B. Petersen,(2002), Working Capital and Fixed Inventory: New Evidence on Financing Constraints, Rand Journal of Economics 24, Garcia-Teruel, P. J., P. Martinez-Solano, J. P. Sanchez-Ballesta, (2008). Accruals Quality and Corporate Cash Holdings, Journal of Accounting and Finance, Vol 49, pp Guide Rodposhti, F., and A. Kiai, 2008, "Review and explain working capital management in firms listed in Tehran Stock Exchange", Journal of Accounting Research, No. 13 Haji, Z., 1384, "Journal of the audit." Look Publications, second edition, page 85 Jani E. Hoesli M. Bender A. w.d. (2004). Corporate Cash Holdings and Agency Conflicts, available at Jensen, M. C., and W.H. Meckling,(1976)," Theory of the Firm: Managerial Behavior, Agency Cost, and Ownership Structure", Journal of Financial Economics, 3: Jensen, M.C. (1998). Self-Interest, Altruism, Incentives of Agency Theory. Foundation of Organizational Strategy. Harvard University Press Khorram race, M. "Evaluation of operational working capital management and its influencing factors" Payanamh MS, Ferdowsi University of Mashhad in 1386 Loaniz,F.&A.Lazaridiz,(2004), The Relationship between Working Capital Management and Profitability Working Paper, SSRN Electronic Library. Mirtoni, A., 2009, "Analysis of working capital management, manufacturing companies," Master's thesis, Faculty of Management and Accounting, Allameh Tabatabai University Nobanee. H & AlHajjar.M,(2010) Working Capital Management, Operating Cash Flow and Corporate Performance.Department of Banking and Finance, The Hashemite University, P.O. Box , Zarqa, 13133, Noravesh, Iraj, Ali Ebrahimi Krdlrvjlal second Wafi, 1388 "Exploring the Relationship between Corporate Governance mechanisms and agency costs of listed companies in Tehran Stock Exchange " Master's thesis. Tehran University. Nvrvsh, I., G. Karami, 1388 "Exploring the Relationship between Corporate Governance mechanisms and agency costs of listed companies in Tehran Stock Exchange. Journal of Accounting Research. s Lawyer, H., Jacob, race, or, "The relationship between working capital management and profitability of listed companies in Tehran Stock Exchange blond ", Journal of Portfolio Management and Financial Engineering, Summer 2010, Issue II 110

9 Solano, M. &J,G Teruel, (2006), Effects of Working Capital Management on SME Profitability, Working Paper, SSRN Electronic Library. Technical Committee on Corporate Audit, Standards, International Journal of Accounting 88, pp