ARTICLE REVIEW

TITLE

CAPITAL STRUCTURE AND CORPORATE PERFORMANCE EMPIRICAL STUDY ON THE

PUBLIC JORDANIAN
SHAREHOLDINGS FIRMS LISTED IN THE AMMAN STOCK MARKET
 TITLE

CAPITAL STRUCTURE AND CORPORATE PERFORMANCE EMPIRICAL STUDY ON

THE PUBLIC JORDANIAN
SHAREHOLDINGS FIRMS LISTED IN THE AMMAN STOCK MARKET

The title were more informative but the title not clarify time gap of the study on the title
Also the title can described the target audience between capital structures on the performance
of the public Jordanian firms
The title can also less than two hundred fifty words
Author
Mustafa M Soumadi
Osama Suhail Hayajneh
Financial and Administrative Sciences Department Al-Balqa Applied University,

Key word
Capital structure, performance, profitability, debt, financial leverage, firm and Jordan
ABSTRACT
The study investigates the effect of capital structure on the performance of the public
Jordanian firms listed in Amman stock market.
The study used multiple regression model
The results of the study concluded that capital structure associated negatively and
statistically with firm performance on the study sample
The study found out that there was no significant difference to the impact of the financial
leverage between high financial leverage firms and low financial leverage firms on their
performance
In these section the authors can abstract the objectives of the study but the author didn’t
mention methods of data collection and presentation
 1. Introduction
The relationship between capital structure and firm performance is considering of
argumentative topics in the literature of corporate finance and that sparked the financial
economists whether to be financial or non-financial firms.
It should be noted that there are multiple financing sources, where the firms can depend on it
to finance their investments.
Financing sources categorize into two sources, the internal financing which includes
common stock issuance, preferred stocks, reserves and retained earnings.
Another source called external financing which consists short and long term loans and bonds
issuance.

Capital structure of Jordanian firms contain,

As shown on the balance sheets of industrial and services firms
Account payables, banking loans, short term loans and accruals as current liabilities and
long term of notes payable and loans and bonds issuance as long term liabilities.
With regard of internal financing implies owner equity that includes capital in paid (common
stock), compulsory and voluntary reserves and retained earnings.
The study examines what is the effect of capital structure on firm’s performance? , and in
particular debt
First scenario involves positive relation between capital structure and firm performance
which indicates when the firms depend on debt as much as firm’s needs, it will lead to
enhance their performance.
It can explain that when the financial manager depends on debt as financing source more
than owner equity.
Financial manager prefers debt source more than equity refers to two reasons:
The cost of debt is less than equity cost and the tax advantage of debt, which would therefore
maximize the firm performance.
Second scenario designate, that there is an inverse correlation between capital structure and
firm performance.
Whenever, the firm depends on debt without employing it into profitable investments.
Thus, the cost of debt will exceed the return that firm will obtain it.
Finally, third scenario is that, there is no relationship between capital structure and firm
performance
Since this scenario supposes that cost of debt is relatively stable and the cost of equity is not
constant.
When the debt reaches to certain level, any additional borrowing will lead to inability of firm
to meet its financial obligations.
The study will try to contribute to provide further evidence to test the impact of capital
structure on firm performance by answering the following questions:
- How does the capital structure effect on Jordanian firm’s performance generally?
- Is there a difference in performance between the high levered firms and low levered
firms in regard to the impact of capital structure?
- Does the effect of performance have more impact on high growth firms or low growth
firms or vice versa?

2 Literature review
2-1-Theoritical literature review
The roots of capital structure theory refers to more than fifty decades since the seminal work
which presented by Modigliani and Miller 1958(thereafter MM).
They proved, under restrictive assumptions (no taxes and transactions costs) that cost of
capital does not affect on capital structure, particularly debt then not effect on firm value
where this theory called irrelevancy preposition
Latterly , Modigliani and Miller(1963) presented new proof that cost of capital affect on
capital structure, and therefore affect on value of the firm with relaxing unrealistic
assumptions that there are existing taxes, which indicate that borrowing give tax advantage,
Where the interest deducted from the tax and it will result tax shields, which in turn reduce
the cost of borrowing and then maximize the firm performance (Miller, 1977)
And this require from the firm to make tradeoff between the cost of debt from side and the
benefits of using debt from another side.
Sequence, the researchers studied the relationship between capital structure and the value of
the firm through appearing new theory called the agency theory
Which indicates to potential conflict between shareholders and managers from on the one
hand and the potential conflict between shareholders and debtors form on the other hand.
Potential conflict between shareholders and managers arises when the shareholders choose
the manager as an agent of their selves to manage the firm in order to maximize their wealth
, but the mangers concentrate on the high profitable and risky projects to achieve their
interests at first that represented incentives and rewards, and after that concerning of
shareholders benefits, all of these lead to maximize the firm value (Jensen and Meckling
(1976),Harri and Raviv(1991), and Myer(2001)).

2-2-Empirical literature review

This section discusses some scientific studies, which examined the impact of capital structure
on firm performance. This section will divide into three parts:

First part presents some studies that indicate a positive relationship between capital structure
and firm performance.

Second part shows a negative correlation between capital structure and firm performance.

Last part displays mixed results.

2-2-1 Positive relationship between capital structure and firm performance

Wippern (1966) investigated the relationship between financial leverage and firm value on
some industries which marked on high degree in difference characteristics from where
growth, cost and demand.

The study used debt to equity ratio as financial leverage indicator and earnings to market
value of common stock as performance indicator.

Results revealed that leverage effect positively on firm value

Dessi and Robertson (2003) found that financial leverage affect positively on the expected
performance,

Where they explained this result to that low growth firms attempt to depend on the borrowing
for utilizing the expected growth opportunities and investing borrowing money at the
profitable projects, therefore it will increase the firm performance.

Margrates and Psillaki (2010) proved also that financial leverage (debt ratio) correlated
positively and significantly with firm performance (added value, labor and capital).
2-1-2-Negative relationship between capital structure and firm performance
Majumdar and Chhibber (1997) and Ghosh (2007) reached that level debt (capital structure)
associated inversely with firm’s performance.
The result refers to the creditors who are using loans as disciplinary tool on the firm.
This tool bases on the restrictions that impose by creditors on the firm as prevention the firm
from distribute the earnings on the shareholders or impose restrictive conditions on the loans
by increasing the interest rates or impose sufficient collaterals on loans ,
Abort (2005) noted that various capital structure measure which represented short term debt,
long term debt and total debt associated negatively and statistically with firm performance.

2-1-3-Mixed results of capital structure and firm performance

Hurdle (1973) revealed that financial leverage effects negatively with profitability in
accordance with two stage least squares (2SLS) and positively according to ordinary least
squares (OLS).

McConnell and Servaes (1995) and Agarwal and Zhao (2007) presented additional evidence
on how the growth of the firm may affect on the relationship between capital structure and
performance.

High growth firms effect negatively between financial leverage and firm value, while low
growth firms effect positively.

3. Methods of data collection sample and variables of study

3-1- Study sample

The society of study contains manufactured and services firms that listed in Amman bourse
for the period (2001-2006).
Financial data extracted from two main sources:
Annual financial reports that issued by the firms at end of each year and the public
shareholding firms guide.
The sample of study consists 76 firms (53 manufactured firms and 23 services firms) from the
total of 129 firms as shown in table (1) with excluding financial firms because the
characteristics differ than sample of study and unavailable firms data.
Table 1: Sectors category and the sample of firms
Sectors category Total firms Numbers of sample firms
Commercial services 13 5
Educational services 6 2
Healthy Services 3 1
Tourism and hotels 12 5
Media 3 2
Communications and 3 0
technology

Transportation 10 5
Utility and energy 7 3
Chemical industries 11 8
Electrical industries 5 4
Engineering and 8 5
construction industries

Food and beverage 12 10

Textiles and leathers 7 4
Mining and extraction 12 10
Pharmaceutical industries 7 3

Other industries 10 9
Total 129 76

3-2- Variables of study

3-2-1- Performance variables
The study will use profitability and firm value as dependent variables to measure the firm
performance to examine the effect of capital structure and firm performance.
Literature review used many measures to measure the profitability by using the indicators
which express of performance such as return on equity, return on asset, earning to stock price
and gross profit margin ratio.
Return on equity as profitability measure which measure the return that shareholders can
obtain it’s from utilize the capital structure efficiently by the firm management

Tobin q :It express the firm value which measure by dividing the market value of owner
equity plus the book value of total liabilities to the book value of total assets

3-2-2- Independent variables the study implies four independent variables to identify what is
the effect of capital

Structure on firm performance that includes:

Financial leverage: dividing the book value of total liabilities to the book value of total assets
Tangible assets: dividing the net fixed assets to total assets
Firm size: It is control variable which measure by natural logarithm of total assets

Firm growth: It is measure by find the difference rate in the book value of total assets.

4. Hypotheses of the study

4-1.Hypotheses and econometric model of study

First hypothesis: under stable environmental conditions, if the firm depends on financial
leverage extremely, it will lead to enhance the firm performance.

Second hypothesis: cetres paribus, there are significant differences between the financial
leverage of high levered firms and the financial leverage of low levered firms in effect on firm
performance.
Third hypothesis:cetres paribus ,there are no significant differences between the financial
leverage of high growth firms and the financial leverage of low growth firms in effect on firm
performance.

This study used d/t data presentation and interpretation method those are preferable and
applicable those are

Descriptive statistics for variables

Regression from PLS mode

Also use secondary data but the time gap cannot be described

The researcher examines different researches made by different authors as a basic

comparison related to the data collected by themselves.
4-2- Econometric model methods of presentation
The study tries to investigate the previous hypotheses by using ordinary least squares model
to determine what the effect of capital structure on firm performance.

The study builds general multi-regression model as following:

Yi, t = αi + βiXi, t + ei,t

Where: Yi,t: dependent variable for firm i in year t.

αi: constant coefficient for firm i.

βi: slope coefficient of independent variables of firm i,

Xi,t: independent variables for firm i in year t,

ei,t: standard error of firm i in year t.

Based on previous model, following two equations demonstrate the effect of capital structure
on firm performance which implies two measures of performance: return equity and firm
value.

ROE i,t = αi + β1Lev i, t + β2Tani, t + β3Siz i, t + β4Groi, t + ei,

Tobin qi,t = αi + β2Lev i, t + β2Tani, t + β3Siz i, t + β4Groi, t + ei

5. Empirical analysis
5-1-Descriptive statistics
This section shows the descriptive statistics for the variables of the study that used in the
analysis to identify the nature of data and the extent of its suitability for using.

Where it is noted form table 2 that the average financial leverages for sample of study 31%
approximately and this percent considers moderate for the firms.

As well as analysis indicates that the minimum percent of financial leverage is 1%, whereas
the maximum value reached it is 92% and this percent is very high.

This denotes that there is high variation in using financial leverage. With regard to return on
equity, the average of return reached 6.1% and these percent is very low with comparing of
high return which is 40.6%.
It refers to some firms achieve large losses and this indicate to weakness of firm performance

Generally. Firm value represented by Tobin q which the average is 1.36 and also the results
indicates to decline the firm performance with comparing of the maximum value which equal
7.18, while the standard deviation proves that there is high variationin firm value.

Table 2: Descriptive statistics

Descriptive statistics of sample study
Leverage Tangible Size Growth ROE Tobin q
assets

Minimum .01 .0015 6.07 -.6520 .443- .37

Maximum .922 .937 8.71 3.32 .406 7.18
Mean .308 .4358 7.15 .1257 .061 1.36
Std.Dev. .207 .2479 .5541 .3511 .091 .7173
Descriptive e statistics of high levered firms
Leverage Tangible Size Growth ROE Tobin q
assets

Minimum .0227 .0054 6.19 -.6520 -.44 .53

Maximum .92 .93 8.71 3.32 .3186 7.18
Mean .4561 .4065 7.3 .1257 .0463 1.324
Std.Dev. .1840 .2412 .5836 .3511 .0897 .6588
Descriptive e statistics of low levered firms
Leverage Tangible Size Growth ROE Tobin q
assets

Minimum .007 0.0015 6.07 -.3657 -.3241 .3855

Maximum .4336 .9016 8.41 .9635 .406 5.83
Mean .1607 .3751 7.02 .0514 .0754 1.42
Std.Dev. .0935 .2400 .4864 .1560 .0902 .7692
Descriptive e statistics of high growth firms
Leverage Tangible Size Growth ROE Tobin q
assets

Minimum .0167 .018 6.10 -.652 -.3241 .3855

Maximum .883 .9375 8.71 1.24 .406 7.18
Mean .2990 .4816 7.27 .096 .087 1.75
 Std.Dev. .1872 .2423 .5936 .2214 .0956 .8226
Descriptive e statistics of low growth firms
Leverage Tangible Size Growth ROE Tobin q
assets
Minimum .01 .0015 6.07 -.4763 -.4431 .3917
Maximum .92 .9146 8.56 3.32 .2932 1.93
Mean .3084 .3939 7.04 .0814 .0346 0.9971
Std.Dev. .2239 .2450 .5125 .3173 .0825 .2657

So, we see that the average of the financial leverage for the high levered firms which
amounted to 45.6% is larger than average of financial leverage for the low levered firms
(16.1%)

And thisrefers to the importance of the debt in financing of invested operations for firms and
also refers to that high levered firms balance nearly between debt and equity.

Average of return on equity for each of high and low growth firms is closed in the value and
express to weak performance with in comparison with the maximum values for both.

Weak performance may return to large of losses.

5-2-Regression analysis
Table (3) shows that financial leverage for the sample of study effects negatively and
statistically at level less than 1% on return equity and less than 5% on Tobin q.

Table 4 shows the results of regression analysis for financial leverage of high and low levered
firms that financial leverage associated negatively and significantly at the significance level
of less than 1% on return on equity and insignificantly on firm value.
Table (3): Regression results of sample of study
ROE Tobin q
β S.E t-value β S.E t-value
α -.244 .051 -4.74 -.043 S.E -.09
Financial -.146* .02 -7.21 -.559* .46 -3.09
leverage

Tangible -.063* .016 -4.02 .007 .181 .052

Assets

Size .051* .007 7.05 .218* .140 3.32

Growth .083* .014 5.94 .237*** .064 1.9
R^2 25.2% 4%
F 38.04 4.7
No. 456 456
observation
s
*, ** and*** indicate significant at 1%, 5% and 10%.

Table (4): Regression Analysis results base on high and low levered firms
Return on equity
High levered firms Low levered firms
Parameters β S.E t-value β S.E t-value
α -.062 .069 -.907 -.348*** .078 -4.45

Leverage -.171* .029 -5.90 -.039 .06 -0.658

Tangible Assets -.106* .022 -4.76 -.045** .022 -2.081

Size .032** .009 3.41 .062* .011 5.42

Growth .057* .015 3.81 .193* .034 5.63
 R^2 29.3% 28.8%
F 22.99 22.40
No. 228 228
observations

Tobin q
High levered firms Low levered firms
Parameters β S.E t-value β S.E t-value
α -.156 .588 0.295 .230 .778 0.295

Leverage -.706* .245 .127 .075 .593 .127

Tangible Assets -.007 .189 0.082 0.018 .217 0.082

Size .244* .079 1.43 .163 .114 1.43

Growth .215** .126 1.55 .527 .34 1.55

R^2 7.1% 2.9%

F 4.23 1.63
No. 228 228
observations
*, ** and*** indicate significant at 1%, 5% and 10%.

Table (5): Regression analysis results base on growth firms

Return on equity
High growth firms Low growth firms
Parameters β S.E t-value β S.E t-value
α -.110 .069 -1.60 -.212 .081 -2.61

Leverage -.183* .032 -5.81 -.074* .027 -2.712

Tangible Assets -.123* .023 -5.549 -.049** .023 -2.18

Size .042* .01 4.27 .040* .012 3.47

Growth .102* .025 4.16 .068* .016 4.16
R^2 32.6% 18.5%
 F 26.94 12.66
No. 228 228
observations

Tobin q
High growth firms Low growth firms
Parameters β S.E t-value β S.E t-value
α 1.67 0.694 2.41 .764 .285 2.67

Leverage -.475 .318 -1.50 0.005 .096 0.054

Tangible Assets -.793* .227 -3.50 .086 .08 1.070

Size .080 .098 0.815 .027 .041 0.657

Growth .165 .247 .667 .117** .058 2.03

R^2 7.7% 2.6%

F 4.68 1.48
No. 174 228
observations
*,** and*** indicate significant at 1%,5% and 10%.
 6. Conclusion
Capital structure considers of debated topics that increasing the concerning of financial
economists.

This article has tried to give an overview about what effect of capital structure on the
performance of the public Jordanian firms listed in Amman stock market.

The study investigated the effect of capital structure on Jordanian firm's performance for
period (2001-2006) by using ordinary least squares as regression technique, which the
sample includes 76 firms, where the results reached to the following results:

-Financial leverage for the sample study effects negatively and statistically at level less than
1% on firm performance (return on equity) and less than 5% on firm value.

Negative relationship refers to wish of firm to finance its activities through increasing
borrowing operations and results of excess in borrowing , which lead to emerge of
bankruptcy risks that decrease the tax shields and then to minimize the firm performance.

-The study found that there are no significant differences between high levered firms and low
levered firms to effect of financial leverage on firm performance.

The result also revealed negative and significant relationship.

-In addition to prior, the study that financial leverage related inversely and significantly on
firm performance regardless of growth of firms

7. Recommendation
In order to stay in a competitive business, companies have to engage in research and
development, which helps to use the opportunities of future market.

Preparing a strategic plan for the firms are very important in order to get fast growth.

Comparing financial actual performance helps the company to stay competitive in the
industry

Financial leverage for the sample study effects negatively and statistically at level less than
1% on firm performance (return on equity) and less than 5% on firm value so the firm finance
its activity on e excess borrowing it leads risks and treats so the firm can meet its activity on
balancing working capital management.
Also the firm can lead its business through other financing source

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