| Summary: | For more than five decades, the issue of capital structure still remains a puzzle. One of the issues is the lack of consensus to choose either debt or equity that would qualify as the optimal capital structure. The study investigated the determinants of capital structure by exploring traditional financial theories (trade-off theory and pecking order theory) and agency cost hypothesis. The study was conducted on Iranian firms listed on the Tehran Stock Exchange for the period of 2001 to 2010. A panel data set of 123 published annual reports of these firms was compiled. The data was used to analyse the impact of the financial and corporate governance factors on the debt and equity structure of these firms. Ordinary Least Squares, Fixed Effect and Generalized Method of Moments methodologies were used in the analysis. The results stated that capital structure is positively related to tax rate, size, capital intensity, and risk, but negatively related to profit, growth and tangibility. As for the agency cost, government ownership has positive impacts on capital, indicating that these firms are exposed to financial distress with increasing debt. In contrast, capital structure is negatively related to the legal person ownership, ownership concentration of the single largest shareholder and the ten largest shareholders, indicating that these firms are able to manage their debts and future prospects. The effects of agency cost on capital structure shown in the study serve as the evidence of agency conflicts based on debt and equity explanations. In addition, the findings of this study predicted the financial and non-financial factors of capital structure. The study has contributed to the field of finance by identifying capital structure determinants, and provided valuable insights on optimizing capital structure among the Iranian firms which would provide information for investors as well as other stakeholders.
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