The Relationship between capital structure, free cash flow, diversification and firm performance

Abstract

This study investigated whether there are inter-relationships among capital structure (financial leverage), free cash flow, diversification and firm performance. Methodology: To this, 78 active firms in this area were selected between 2011 and 2015. Internal independent variables involve capital structure, free cash flow, diversification and firm performance. To study inter-relationships of variables, simultaneous equation system and STATA software were applied. Results: Results indicated that a positively significant relation exists between free cash flow and firm performance in 95% level of significance. There is a negatively significant correlation between capital structure and free cash flow in 95% level of significance. Between free cash flow and diversification, a negative and significant relation exists, with 90% level of significance. And, a bi-directional relation exists between capital structure and firm performance in 90% level of significance. There is no bi-directional relation between diversification and firm performance. Conclusion: Finally, according to results, capital structure and diversification have no bi-directional relation.