How to Cite
Almahadin H. A., & Oroud Y. S. (2020). Capital Structure-Firm Value Nexus: Moderating Role of Profitability. Revista Finanzas y Política Económica, 11(2), 375-386. Retrieved from https://revfinypolecon.ucatolica.edu.co/article/view/2904

Abstract

This study aims to investigate the moderating role of profitability in the relationship between capital structure and firm value in Jordan, as an example of an emerging economy. For this purpose, two functional models were formulated to capture the direct relationship as well as the interaction impact of capital structure on firm value. The robust empirical findings of panel data analysis provide strong evidence of an adverse relationship between capital structure and firm value. The findings confirm that the impact of capital structure appears to be complicated in nature and difficult to examine without controlling for the interaction of profitability as one of the major determinants. Therefore, studying the interaction effect provides ample evidence and enhances the understanding of the link between firm value and capital structure. The empirical results of the study may provide important insights and policy implications to decision-makers.

Licence

Copyright (c) 2020 Revista Finanzas y Política Económica

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

References

1. Ahmad, N. & Abdul-Rahim, F. (2013). Theoretical investigation on determinants of government-linked
companies capital structure. Journal of Accounting, Finance and Economics, 3(2), 72-85.

2. Ahmed, N., Ahmed, Z. & Ahmed, I. (2010). Determinants of capital structure: A case of life insurance
sector of Pakistan. European Journal of Economics, Finance and Administrative Sciences, 24(24), 7-12. https://doi.org/10.22495/rcgv6i4c1art13

3. Amran, N.A. & Che Ahmad, A. (2011). Board mechanisms and Malaysian family companies’ performance.
Asian Journal of Accounting and Governance, 2, 15-26. https://doi.org/10.17576/ajag-2011-2-6538

4. Baddeley, M.C. & Barrowclough, D.V. (2009). Running Regressions: A Practical Guide to Quantitative
Research in Economics, Finance and Development Studies. Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9780511814839

5. Baltagi, B. (2008). Econometric analysis of panel data. John Wiley & Sons.

6. Baum, C.F. (2001). Residual diagnostics for cross-section time series regression models. The Stata
Journal, 1(1), 101-104. https://doi.org/10.1177/1536867X0100100108

7. Brealey, R., Leland, H.E. & Pyle, D.H. (1977). Informational asymmetries, financial structure, and financial
intermediation. The Journal of Finance, 32(2), 371-387. https://doi.org/10.1111/j.1540-6261.1977.tb03277.x
https://doi.org/10.2307/2326770

8. Cohen, S. & Wills, T.A. (1985). Stress, social support, and the buffering hypothesis. Psychological
Bulletin, 98(2), 10. https://doi.org/10.1037/0033-2909.98.2.310

9. Denscombe, M. (2008). Communities of practice: A research paradigm for the mixed methods approach.
Journal of Mixed Methods Research, 2(3), 270-283. https://doi.org/10.1177/1558689808316807

10. Donker, H., Poff, D. & Zahir, S. (2008). Corporate values, codes of ethics, and firm performance: A
look at the Canadian context. Journal of Business Ethics, 82(3), 527-537. https://doi.org/10.1007/s10551-007-9579-x

11. Driscoll, J.C. & Kraay, A.C. (1998). Consistent covariance matrix estimation with spatially dependent
panel data. Review of Economics and Statistics, 80(4), 549-560. https://doi.org/10.1162/003465398557825

12. Fama, E.F. & French, K.R. (1998). Taxes, financing decisions, and firm value. The Journal of Finance, 53(3),
819-843. https://doi.org/10.1111/0022-1082.00036

13. Ghosh, A. and Jain, P.C. (2000). Financial leverage changes associated with corporate mergers. Journal of
Corporate Finance, 6(4), 377-402. https://doi.org/10.1016/S0929-1199(00)00007-9

14. Groth, J.C. & Anderson, R.C. (1997). Capital structure: perspectives for managers. Management
Decision, 35(7), 552-561. https://doi.org/10.1108/00251749710170529

15. Hamid, M.A., Abdullah, A. & Kamaruzzaman, N.A. (2015). Capital structure and profitability in family
and non-family firms: Malaysian evidence. Procedia Economics and Finance, 31, 44-55. https://doi.org/10.1016/S2212-5671(15)01130-2

16. Hatfield, G.B., Cheng, L.T. & Davidson, W.N. (1994). The determination of optimal capital structure: The
effect of firm and industry debt ratios on market value. Journal of Financial and Strategic Decisions, 7(3), 1-14.

17. Hsiao, C. (2003). Analysis of panel data (Vol. 34). Econometric Society Monographs. https://doi.org/10.1017/CBO9780511754203

18. 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. https://doi.org/10.1016/0304-405X(76)90026-X

19. Kinsman, M. & Newman, J. (1999). Debt level and firm performance: an empirical evaluation. Paper
presented at the 28th Annual Meeting of the Western Decision Science Institute. Puerto Vallarta, Mexico.

20. Kochhar, R. (1997). Strategic assets, capital structure, and firm performance. Journal of Financial and Strategic
Decisions, 10(3), 23-36. http://www.financialdecisionsonline.org/archive/pdffiles/v10n3/kochhar.pdf

21. Kumar, S., Colombage, S. & Rao, P. (2017). Research on capital structure determinants: a review and
future directions. International Journal of Managerial Finance, 13(2), 106-132. https://doi.org/10.1108/IJMF-09-2014-0135

22. Kyereboah-Coleman, A. (2007). The impact of capital structure on the performance of microfinance
institutions. The Journal of Risk Finance, 8(1), 6-71. https://doi.org/10.1108/15265940710721082

23. Majumdar, S.K. & Chhibber, P. (1999). Capital structure and performance: Evidence from a transition
economy on an aspect of corporate governance. Public Choice, 98(3-4), 287-305. https://doi.org/10.1023/A:1018355127454

24. Miller, M.H. (1977). Debt and taxes. The Journal of Finance, 32(2), 261-275. https://doi.org/10.2307/2326758 https://doi.org/10.1111/j.1540-6261.1977.tb03267.x

25. Modigliani, F. & Miller, M.H. (1958). The cost of capital, corporation finance and the theory of investment.
The American Economic Review, 48(3), 261-297. https://gvpesquisa.fgv.br/sites/gvpesquisa.fgv.br/files/arquivos/terra_-_the_cost_of_capital_corporation_finance.pdf

26. 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. https://doi.org/10.1016/0304-405X(84)90023-0

27. Nadaraja, P., Zulkafli, A.H. & Masron, T.A. (2011). Family ownership, firm’s financial characteristics and
capital structure: evidence from public listed companies in Malaysia. Economia Seria Management, 14(1),
141-155. https://ideas.repec.org/a/rom/econmn/v14y2011i1p141-155.html

28. Pandey, I.M. (2004). Capital structure, profitability and market structure: Evidence from Malaysia. Asia
Pacific Journal of Economics and Business, 8(2), 78.

29. Ramlall, I. (2009). Determinant of capital structure among non-quoted Mauritian firms under specificity
of leverage: Looking for a modified pecking order theory. International Research Journal of Finance and
Economics, 31(31), 83-92.

30. Ross, S.A., (1977). The determination of financial structure: the incentive-signalling approach. The Bell
Journal of Economics, 23-40. https://doi.org/10.2307/3003485

31. Saleem, F., Rafique, B., Mehmood, Q., Irfan, M., et al. (2013). The determination of capital structure of
oil and gas firms listed on Karachi stock exchange in Pakistan. Interdisciplinary Journal of Contemporary
Research in Business, 4(9), 225-235. https://journal-archieves27.webs.com/225-235.pdf

32. Sander, P. (2003). Capital Structure Choice in Estonian Companies: A Survey. Management of Organizations:
Systematic Research, 27.

33. Simerly, R.L. & Li, M. (2000). Environmental dynamism, capital structure and performance: a theoretical
integration and an empirical test. Strategic Management Journal, 21(1), 31-49. https://doi.org/10.1002/(SICI)1097-0266(200001)21:1<31::AID-SMJ76>3.0.CO;2-T

34. Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1),
3-27. https://doi.org/10.1016/0304-405X(90)90011-N

35. Ting, I.W.K. & Lean, H.H. (2011). Capital structure of government-linked companies in Malaysia. Asian
Academy of Management Journal of Accounting & Finance, 7(2). http://web.usm.my/journal/aamjaf/vol%207-2-2011/7-2-6.pdf

36. Wooldridge, J.M. (2010). Econometric analysis of cross section and panel data. MIT Press.

37. Yat Hung, C., Ping Chuen Albert, C., & Chi Man Eddie, H. (2002). Capital structure and profitability
of the property and construction sectors in Hong Kong. Journal of Property Investment & Finance, 20(6),
434-453. https://doi.org/10.1108/14635780210446469

38. Zhou, Y., Tsang, A.S., Huang, M., & Zhou, N. (2014). Group service recovery strategies effectiveness: The
moderating effects of group size and relational distance. Journal of Business Research, 67(11), 2480-2485.
https://doi.org/10.1016/j.jbusres.2014.03.008
Sistema OJS 3 - Metabiblioteca |