MEZIESBLOG

3.1. Sample and Data Collection

We obtained the financial data from annual reports of manufacturing firms listed on the Teheran Stock Exchange (TSX) during 2011–2019. Initially, our preliminary sample included all manufacturing firms. This is because the industrial sector has a significant role on Iranian economic growth and has an enormous capital structure that consists of debt and equity [24], and this information is published in their annual report adequately. However, the COVID-19 pandemic and other financial crises led to the delisting and closure of some listed manufacturing firms. Hence, the study collected data from 156 manufacturing firms during 2011–2019. In total, there were 1404 observations. The sample firms were spread out throughout thirteen different industries, as identified by the Tehran Stock Exchange (TSX) (Tehran, Iran).

3.2. Variables and Their Measurements

3.2.1. Profitability

Profitability is considered to be a dependent variable in this study, and theoretically, capital structure, as an internal factor, directly affects profitability. In the previous literature, profitability was measured using different accounting indicators, such as return on assets, return on equity, Tobin’s Q, earnings per share, and assets turnover [16,17,18,42,46,62,63,64,65,66]. This study used return on assets (ROA), Tobin’s Q (TOBQ), and earnings per share.

3.2.2. Capital Structure

Capital structure can be seen as a combination of debt and equity in the corporate form of funding [67]. In this study, capital structure is an independent variable and can be considered an important factor that explains the findings of this investigation. According to the related theories, capital structure is expected to have a significant impact on firm profitability [12]. Prior investigations measured capital structure using different proxies, such as short-term debt ratio, long-term debt ratio, total debt ratio, equity ratio, equity multiplier, and debt-to-market capitalization ratio [1,12,16,17,18,64,68,69,70,71,72]. Our study measured capital structure using both debt-to-market capitalization ratio and total debt ratio.

3.2.3. Firm Size

Big firms are different from small firms in several ways, and this leads to different impacts on firm profitability [51]. Hence, the correlation between capital structure decisions and profitability can be strengthened or weakened by firm size. The current study used firm size as a dependent variable. Firm size also has a role as a moderator to influence the relationship between capital structure and profitability. Firm size is measured in the literature using total assets, total sales, number of employees, and number of members [1,6,28,69,73,74]. The present study used total sales for measuring firm size.

3.2.4. Control Variables

There are several factors that are thought to influence capital structure decisions, yet some of them are important in certain countries but not in others [75]. In order to assess the relationship between firm size, capital structure, and firm profitability accurately, two control variables were used in our research. We included these variables in the regression models to protect and control the industry characteristics and reduce the selection bias. In line with the previous literature [31,71,76], the present study used sales growth and firm age as control variables. According to [22,31,77], firm performance and profitability are positively impacted by both sales growth and firm age, while [70,71] reported a negative link between performance and firm age. Table 1 summarizes the definition of the study variables.