What is it about?
This study examines the impact of debt financing on both performance and systematic risk in Amman Stock Exchange listed firms. We focus our study to analyze the differences between services and industrial firms in one sense and the differences between international and domestic firms in the other sense, as we depend on the geographical distribution of sales to classify the nationality of firms.
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Why is it important?
The importance of this study stems from its nominated objectives and the lack of empirical studies on the comparison between the international firms and the local firms that are operating in Jordan in terms of the impact of debt financing on the financial performance. So, it provides a visibility on the capital structure for both international and local firms and to see how the structure is. On the other hand, this study highlights the impact of leverage ratio on the systematic risk as we didn’t find a lot of studies take this part, some studies are looking for the impact of the risk on the firm’s capital structure or the impact of the risk on the performance of the firm, while this research takes the opportunity to examine the impact of debt financing on the systematic risk and to check is there any variance between the international firms and the local firms.
Perspectives
The empirical results indicate that there is a significant impact of debt financing on the two measures of firm’s performance ROA and ROE and this relationship is negative, as any increase in the debt financing will lead to decrease in ROA and ROE. This result supported the tradeoff theory which argues that the increase in the financial leverage the firm’s performance decreases and this will happens due to the increase in the marginal cost of debt. Memonet. al., 2012 mentions that the more uses of debt will increase the agency cost which affects the performance negatively. There are no directional effect differences between the services firms and industrial firms in term of the impact of debt financing on the firm’s performance as their performance is affected negatively. Additionally, there are no directional effect differences between the international firms and domestic firms in term of the impact of debt financing on the firm’s performance as their performance is affected negatively. However, there are quantitative differences of the impact of debt financing on firms performance according to firm's sector and nationality.
MSc Qais Aldasouqi
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This page is a summary of: Sales nationality and debt financing impact on firm’s performance and risk, EuroMed Journal of Business, May 2017, Emerald,
DOI: 10.1108/emjb-05-2016-0015.
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