Determinants of profitability in Jordanian services companies
-
DOIhttp://dx.doi.org/10.21511/imfi.17(1).2020.24
-
Article InfoVolume 17 2020, Issue #1, pp. 277-290
- Cited by
- 2338 Views
-
405 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Due to the uniqueness of the services sector in terms of its characteristics and profitability, as well as the lack of studies on this sector, this study is considered to be the first to improve the knowledge of the key factors that play an important role in the profitability of the Jordanian services sector. This study investigates the effect of financial characteristics and capital structure on the profitability of all 46 services companies listed on the Amman Stock Exchange over the period 2014–2018. This study applies fixed and random effects models to panel data variables, namely, size, tangible assets, growth, business risk, debt to equity ratio and debt to assets ratio as independent variables. At the same time, profitability was measured by operating profits (earnings before interest and tax divided by total assets), return on assets (ROA), and return on equity (ROE), which acted as the dependent variables. This study reveals the first evidence that the debt to assets ratio has a negative and significant impact on the profitability of services companies in Jordan. In line with the pecking order theory, this finding suggests that more profitable services companies tend to prioritize the use of retained earnings in financing business activities rather than in financing debt. This study shows that profitability is significantly and positively affected by size and business risk, while ROA is negatively affected by business risk. It also shows that tangible assets have a negative and significant effect on profitability, while growth has a positive and significant effect on operating profits.
- Keywords
-
JEL Classification (Paper profile tab)G23, G32
-
References53
-
Tables7
-
Figures0
-
- Table 1. Description of the variables
- Table 2. Descriptive statistics of Jordanian services companies
- Table 3. Results of unit root test based on LLC test
- Table 4. Correlation coefficients between the variables
- Table 5. Ordinary least squares regression results
- Table 6. Ordinary least squares regression results
- Table 7. Ordinary least squares regression results
-
- Ahmed Sheikh, N., & Wang, Z. (2013). The impact of capital structure on performance: An empirical study of non-financial listed firms in Pakistan. International Journal of Commerce and Management, 23(4), 354-368.
- Al Nimer, M., Warrad, L., & Al Omari, R. (2015). The impact of liquidity on Jordanian banks profitability through return on assets. European Journal of Business and Management, 7(7), 229-232.
- Al-Debi’e, M. M. (2011). Working capital management and profitability: the case of industrial firms in Jordan. European Journal of Economics, Finance and Administrative Sciences, 36(36), 75-86.
- Al-Harbi, A. (2019). The determinants of conventional banks profitability in developing and underdeveloped OIC countries. Journal of Economics, Finance and Administrative Science, 24(47), 4-28.
- Antoniou, A., Guney, Y., & Paudyal, K. (2008). The determinants of capital structure: capital market-oriented versus bank-oriented institutions. Journal of Financial and Quantitative Analysis, 43(1), 59-92.
- Armour, H. O., & Teece, D. J. (1978). Organizational structure and economic performance: A test of the multidivisional hypothesis. Bell Journal of Economics, 9(1), 106-122.
- Bancel, F., & Mittoo, U. R. (2004). Cross-country determinants of capital structure choice: a survey of European firms. Financial Management, 103-132.
- Batten, J., & Vo, X. V. (2019). Determinants of bank profitability – Evidence from Vietnam. Emerging Markets Finance and Trade, 55(6), 1417-1428.
- Chinaemerem, O. C., & Anthony, O. (2012). Impact of capital structure on the financial performance of Nigerian firms. Oman Chapter of Arabian Journal of Business and Management Review, 34(969), 1-19.
- Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3-4), 573-588.
- Drew, M. E., Naughton, T., & Veeraraghavan, M. (2003). Firm size, book-to-market equity and security returns: Evidence from the Shanghai Stock Exchange. Australian Journal of Management, 28(2), 119.
- El-Masry, A., Al-Najjar, B., & Taylor, P. (2008). The relationship between capital structure and ownership structure. Managerial Finance.
- Fisher, I. N., & Hall, G. R. (1969). Risk and corporate rates of return. Quarterly Journal of Economics, 79-92.
- Getahun, M. (2016). Capital structure and financial performance of insurance industries in Ethiopia. Global Journal of Management And Business Research.
- Goddard, J., Tavakoli, M., & Wilson, J. O. (2005). Determinants of profitability in European manufacturing and services: evidence from a dynamic panel model. Applied Financial Economics, 15(18), 1269-1282.
- Goel, U., Chadha, S., & Sharma, A. K. (2015). Operating liquidity and financial leverage: Evidences from Indian machinery industry. Procedia-Social and Behavioral Sciences, 189, 344-350.
- Grabowski, H. G., & Mueller, D. C. (1978). Industrial research and development, intangible capital stocks, and firm profit rates. Bell Journal of Economics, 328-343.
- Greiner, L. E. (1989). Evolution and revolution as organizations grow. In Readings in strategic management (pp. 373-387). Springer.
- Griliches, Z., & Lichtenberg, F. R. (1984). R&D and productivity growth at the industry level: is there still a relationship? In R&D, patents, and productivity (pp. 465-502). University of Chicago Press.
- Gschwandtner, A. (2005). Profit persistence in the ’very’ long run: evidence from survivors and exiters. Applied Economics, 37(7), 793-806.
- Hadlock, C. J., & James, C. M. (2002). Do banks provide financial slack? Journal of Finance, 57(3), 1383-1419.
- Hardwick, P. (1997). Measuring cost inefficiency in the UK life insurance industry. Applied Financial Economics, 7(1), 37-44.
- Hutchinson, M., & Gul, F. A. (2006). The effects of executive share options and investment opportunities on firms’ accounting performance: Some Australian evidence. The British Accounting Review, 38(3), 277-297.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
- Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of political economy, 98(2), 225-264.
- Khan, T., Shamim, M., & Goyal, J. (2018). Panel data analysis of profitability determinants: Evidence from Indian telecom companies. Theoretical Economics Letters, 8, 3581-3593.
- Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of Banking & Finance, 34(3), 621-632.
- Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39(3), 574-592.
- Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
- Nucci, F., Pozzolo, A., & Schivardi, F. (2005). Is firm’s productivity related to its financial structure? Evidence from microeconomic data. Rivista di politica economica, 95(1), 269-290.
- Nunes, P. J. M., Serrasqueiro, Z. M., & Sequeira, T. N. (2009). Profitability in Portuguese service industries: a panel data approach. Service Industries Journal, 29(5), 693-707.
- Olokoyo, F. O. (2013). Capital structure and corporate performance of Nigerian quoted firms: A panel data approach. African Development Review, 25(3), 358-369.
- Onaolapo, A. A., & Kajola, S. O. (2010). Capital structure and firm performance: evidence from Nigeria. European Journal of Economics, Finance and Administrative Sciences, 25(1), 70-82.
- Orser, B. J., Hogarth-Scott, S., & Riding, A. L. (2000). Performance, firm size, and management problem-solving. Journal of Small Business Management, 38(4), 42-58.
- Pantea, M., Gligor, D., & Anis, C. (2014). Economic determinants of Romanian firms’ financial performance. Procedia-Social and Behavioral Sciences, 124, 272-281.
- Pi, L., & Timme, S. G. (1993). Corporate control and bank efficiency. Journal of Banking & Finance, 17(2-3), 515-530.
- Pushner, G. M. (1995). Equity ownership structure, leverage, and productivity: Empirical evidence from Japan. Pacific-Basin Finance Journal, 3(2-3), 241-255.
- Ramadan, I. Z., Kilani, Q. A., & Kaddumi, T. A. (2011). Determinants of Bank Profitability: Evidence from Jordan International Journal of Academic Research, 3(4).
- Ramadan, Z. S., & Ramadan, I. Z. (2015). Capital structure and firm’s performance of Jordanian manufacturing sector. International Journal of Economics and Finance, 7(6), 279-284.
- Roden, D. M., & Lewellen, W. G. (1995). Corporate capital structure decisions: evidence from leveraged buyouts. Financial Management, 76-87.
- Serrasqueiro, Z., & Nunes, P. M. (2008). Determinants of capital structure: Comparison of empirical evidence from the use of different estimators. International Journal of Applied Economics, 5(1), 14-29.
- Shergill, G., & Sarkaria, M. (1999). Impact of Industry Type and Firm Characteristics on Firm-level Financial Performance – Evidence from Indian Industry. Journal of Entrepreneurship, 8(1), 25-44.
- Shubita, M. F., & Alsawalhah, J. M. (2012). The relationship between capital structure and profitability. International Journal of Business and Social Science, 3(16).
- Soumadi, M. M., & Hayajneh, O. S. (2012). Capital structure and corporate performance empirical study on the public Jordanian shareholdings firms listed in the Amman stock market. European Scientific Journal, 8(22).
- Taani, K. (2013). Capital structure effects on banking performance: A case study of Jordan. International Journal of Economics, Finance and Management Sciences, 1(5), 227-233.
- Taani, K., & Mari’e, B. (2011). The effect of financial ratios, firm size and cash flows from operating activities on earnings per share:(an applied study: on Jordanian industrial sector). International Journal of Social Sciences and Humanity Studies, 3(1), 197-205.
- Vaidya, R., & Patel, P. (2019). Determinants of Profitability of Capital-Intensive Firms in the Indian Capital Market: A Static and Dynamic Panel Approach. IUP Journal of Accounting Research & Audit Practices, 18(4), 33-51.
- Vintila, G., & Nenu, E. A. (2015). An Analysis of determinants of corporate financial performance: Evidence from the bucharest stock exchange listed companies. International Journal of Economics and Financial Issues, 5(3), 732-739.
- Weill, L. (2008). Leverage and corporate performance: does institutional environment matter? Small Business Economics, 30(3), 251-265.
- Yang, C.-H., & Chen, K.-H. (2009). Are small firms less efficient? Small Business Economics, 32(4), 375-395.
- Zeitun, R., & Saleh, A. S. (2015). Dynamic performance, financial leverage and financial crisis: evidence from GCC countries. EuroMed Journal of Business, 10(2), 147-162.
- Zeitun, R., & Tian, G. (2007). Capital Structure and Firm Performance: Evidence from Jordan. Australia Accounting Business and Finance Journal, 1(4), 148-168.
- Zeitun, R., & Tian, G. G. (2014). Capital structure and corporate performance: evidence from Jordan. Australasian Accounting Business & Finance Journal, Forthcoming.