Capital Structure, Profitability and Firm’s Value: Evidence from Jordan

Abstract

The purpose of this study is to empirically examine the effect of capital structure and profitability on firm’s value. The study sample included (41) manufacturing companies Out of a total of (63) companies listed on Amman Stock Exchange (ASE) over the five years period (2014-2018). To test the study hypotheses and to achieve its objectives, data was obtained from (ASE) database and annual reports issued by Jordanian manufacturing public shareholding companies. Thus, capital structure (which have been measured by leverage and debt to equity ratio) and profitability (which have been measured by ROA and ROE) are presented as independent variables, while the firm’s value is articulated as the dependent variable using market value and Tobin’s Q as firm’s value measure. Multiple regression analysis is undertaken to analyse the potential effect of capital structure and profitability on firm’s value.The study reveals different results by using different firm’s value measures. When using the first model (market value) the results found that DER has significant effect on market value and the direction of the relationship is positive, while ROA has significant effect on market value and the direction of the relationship is negative. However, when the second model (Tobin’s Q) used the results found that there is no significant effect between all of the independent variables (capital structure and profitability variables) and Tobin’s Q.

Keywords: capital structure, profitability, firm’s value, manufacturing companies, Jordan

DOI: 10.7176/RJFA/10-20-07

Publication date:October 31^st 2019