The Impact of Financial Leverage on the Profitability of Industrial
Companies In Light of the Corona Pandemic, Evidence from Emerging
Economies
NAWAF ABDALLAH ALJUNDIa, AHMAD BANI AHMAD, ANAS AHMAD BANI ATTA
Department of Finance and Accounting Science,
Middle East University,
Amman,
JORDAN
aORCiD: 0000-0001-8396-5753
Abstract: - The present study figures out the impact degree of financial leverage, measured by the ratio of
liabilities to equity, on the profitability of industrial companies in light of the Corona pandemic, measured by
the ratios of the return on equity and return on assets, the study population consisted of industrial companies
listed in the Amman Stock Exchange amounting to (55) companies while the study sample consist of (39)
companies that have data available during the study period, The descriptive analytical approach used in this
study, the statistical program (SPSS) was used to analyze the study data, the mean and standard deviation were
used to describe the study data, and simple regression analysis was used to test its hypotheses, the study found
that there is no statistically significant impact of the degree of financial leverage on the profitability of the
industrial companies listed in the Amman Stock Exchange (ASE) as measured by the return on assets, while
there is a statistically significant impact to the degree of financial leverage on the profitability of the Jordanian
industrial companies listed in the Amman Stock Exchange (ASE) as measured by the return on equity.
The study recommended that the Jordanian industrial companies have to find an optimal capital structure;
besides studying the investment opportunities before borrowing to finance them and relying on self-financing
sources in the first place.
Key-Words: - financial leverage degree, profitability, return on equity, return on assets, Corona pandemic,
capital structure, Jordanian industrial companies.
Received: March 26, 2023. Revised: December 27, 2023. Accepted: January 21, 2024. Published: February 16, 2024.
1 Research Background and
Importance
1.1 Introduction
The main goal for management in the business
sector is profit maximizing, either by increasing
their revenues reducing their costs, or both, one of
the important cost items is the finance costs in
companies generally and in industrial companies
specifically due to their great need to finance their
capital investments and operational expenses,
companies management are responsible for
achieving the objective of profit maximizing by
investing in long term assets and current assets, and
they have to compare between internal financing
sources (equity) and external financing sources short
and long term borrowing to reach the best capital
structure) [1], the study of [2], indicated that the
financing decision considered one of the most
important decisions for public shareholding
companies, in addition, improper selection of the
capital structure can lead to an increase in the cost
of capital, and this leads to a decrease in the net
present value of projects, which makes them
unacceptable, [3]. Financing by borrowing is called
financial leverage, which is defined as borrowing or
using financial instruments that they affect the
profits or losses of the investor often, and it is
expressed as a percentage in one of the recognized
debt ratios, [4], at the beginning of the year (2020)
the Corona virus pandemic(COVID-19) formed is a
severe economic shock to all countries, Jordan was
not immune from this pandemic, and in light of the
Corona pandemic, many industrial companies that
had existing financial obligations in the form of
loans were forced to resort to debt to finance their
investments and provide the necessary liquidity to
conduct their business, which may affect their
profitability because of Loans with fixed costs and
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Ahmad Bani Ahmad, Anas Ahmad Bani Atta
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the pandemic consequent closures that have caused
a decrease in demand for many of these companies
products, and thus a decrease in their revenues.
The present study aims to identify the impact of
the degree of financial leverage on the profitability
of industrial companies in Jordan in light of the
Corona pandemic.
1.2 Study Problem
Leverage ratios are considered a double-edged
sword, On the one hand, they increase investment
risks, however, if they are properly used, they work
to achieve additional returns and tax savings for the
company, and thus increase the profits of the
company and the returns of investors. [5], and some
studies such as, [6], studied the impact of the degree
of financial leverage on the profitability of
borrowing companies in normal circumstances.
This study aimed to investigate the effect of
financial leverage on an industrial company’s
profitability by answering the following question:
Does the degree of financial leverage impact the
profitability of the Jordanian industrial companies
listed on the Amman Stock Exchange in light of the
coronavirus pandemic?
The following two sub-questions are derived from
the main question:
The first sub-question: Is there an impact of the
degree of financial leverage on the return on assets
(ROA) in the Jordanian industrial companies listed
on the Amman Stock Exchange in light of the
coronavirus pandemic?
The second sub-question: Is there an impact of the
degree of financial leverage on the return on equity
(ROE) in the Jordanian industrial companies listed
on the Amman Stock Exchange in light of the
coronavirus pandemic?
1.3 Study Objective
The study's objective is to identify the impact of the
degree of financial leverage on the profitability of
the industrial companies listed in the Amman Stock
Exchange measured by the return on assets (ROA)
and the return on equity (ROE) in light of the spread
of the Corona pandemic.
1.4 The Importance of the Study
The significance of the study lies, practically, in
providing new insights into the extent to which
financial leverage affects profitability in industrial
companies, especially during abnormal economic
circumstances such as the COVID-19 pandemic. It
assists decision-makers in industrial companies by
providing information on the impact of financial
leverage on the industrial companies’ profitability.
Scientifically, the study's importance arises from its
focus on a topic of great importance to industrial
companies, given the intense competition locally
and internationally in securing financing through
borrowing. The study reveals the extent to which
financial leverage achieves the expected results in
the study population. The increased reliance on
borrowing without efficiency in investing borrowed
funds can lead to unrealized expected benefits from
financial leverage and expose the companies to
financial risks if the cost of these funds exceeds the
expected return of investing them. Additionally, this
study, along with similar studies, contributes to
providing a scientific reference in the field of
research related to financial leverage and its impact
on the profitability of industrial companies. This
study distinguished itself from other studies by
examining the impact of financial leverage on the
profitability of industrial companies listed in the
Amman stock exchange during abnormal
conditions, namely the COVID-19 pandemic. This
adds a new dimension in evaluating the expected
impact of financial leverage, considering macro
factors such as political and economic conditions
during the period from the borrowing date until the
settlement date.
1.5 The Study Hypothesis
The study included the following hypothesis
The main hypothesis HO: There is no statistically
significant impact of the degree of financial
leverage on the profitability of the Jordanian
industrial companies listed on the Amman Stock
Exchange in light of the spread of the Corona
pandemic.
The following sub-hypotheses emerge from the
main hypothesis:
H01: There is no statistically significant impact
at the level of statistical significance (0.05 ≥
α) for the degree of financial leverage on the
return on assets (ROA) in the Jordanian
industrial companies listed on the Amman
Stock Exchange in light of the spread of the
Corona pandemic.
H01: There is no statistically significant impact
at the level of (0.05 ≥ α) of the degree of
financial leverage on the return on equity
(ROE) in the Jordanian industrial companies
listed on the Amman Stock Exchange in
light of the spread of the Corona pand.
1.6 Study Terms
Financial leverage: Borrowing the necessary
funds to finance the company's activities,
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and it is measured by the ratio of liabilities
to equity in the company's capital structure,
[6].
Profitability: The positive difference between
total revenues and total expenditures, the
case in which revenues exceed expenses,
and profitability can be defined as the
ability to increase and maximize profits, [7].
Return on Assets (ROA): One of the
profitability indicators measures
management's efficiency in using assets to
generate profits and is calculated by
dividing the net profit by the total assets,
[8].
Return on Equity (ROE): One of the
profitability indicators measures the
efficiency of the company's management in
exploiting the shareholders' money and is
calculated by dividing the net profit after tax
on equity, [5].
1.7 Study Limits
Spatial limits: The present study is limited to the
industrial companies listed on the Amman Stock
Exchange during the period of validity of a
pandemic, which is the years 2020-2021.
Temporal limits: The present study was completed
during the first half of 2023.
1.8 Study Limitations
The short period of the Corona pandemic (2020-
2021) limits the financial data on the performance of
Jordanian industrial companies required for the
study.
2 Theoretical framework
2.1 The Concept of Financial Leverage
One of the important strategic decisions of the
management is to determine the financing mix or
the capital structure, due to its impact on corporate
profitability and risks over time, therefore, it plays a
major and important role in influencing the value of
the company, [8], leverage is a resort to external
financing sources to finance businesses activities, it
is measured by the ratio of debt to equity in the
capital structure of, so that the debts include all the
obligations of the entity, equity include all items of
equity in the entity as well, [6], companies'
justifications for resorting to borrowing vary
between the lack of cash flows needed to meet
debts, the need to finance investment, and to
increase the expected return that is measured as net
income, or to maintain the control of the current
owners over the company's management, [9], but at
the same time that financial leverage is expected to
achieve the above advantages, it also entails an
increase in the company's risks due to the use of
fixed-cost financing, [10]).
The degree of financial leverage is an indicator
of the level of financial risk of the company. It also
reflects the effect of borrowing on the earnings per
share before interest and taxes, [11]. Financial
leverage is a double-edged sword in all cases, it can
achieve the best results when the company works
operationally and financially in an efficient way and
it might lead to counterproductive if all goes wrong.
Long-term loans are considered one of the most
important sources of financing for companies,
especially large ones, due to the possibility of
obtaining them in large amounts It is also possible
to schedule their repayment according to the
expected cash flows of the borrowing company, and
the company must take into account the distribution
of its assets between current and non-current when
borrowing, and to choose between the sources of
obtaining short-term and long-term financing in
terms of cost and reliability, [6].
2.2 Profitability
The concept of profitability refers to the relationship
between the profits achieved by the company and
the investments that contribute to achieving the
profit of the company, profitability can be measured
by the ratio of the income to the revenues achieved
from it or its ratio to the investments that were used
to achieve it, [12], profitability result from two types
of decisions investment and financing decisions,
[13] and the finance sources differ in terms of the
speed of obtaining it, as retained earnings are
considered the first of these sources, then borrowing
and then the issuance of new shares, in companies
that are characterized by high profit rates that enable
them to retain part of them as an internal source of
financing, [14], it is expected that the relationship
between the debt ratio and profitability will be
positive relationship in companies that have a high-
return investment environment, and vice versa in
companies that do not have an investment
environment with attractive returns. Profitability is
considered the main indicator for evaluating the
financial performance of companies by stakeholders
who aim to raise the value of the shares, and the
creditor cares about profitability to ensure the
collection of interest and the principal of their loans,
as for the management, however, it seeks to achieve
goals for both the creditor and the owner; this also
benefits the management itself since profitability
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indicates the management's success in managing the
company's assets, [15]. profitability ratios are also
used as evidence of the company's ability to
generate profits from operating activities compared
to expenses and costs and of the efficiency of
management in using the firms’ resources
efficiently, [16].
There are many indicators for profitability, and
each of them serves specific purpose ; the gross
profit margin reflects the relationship between sales
and the cost of these sales, and the profit margin
before interest and taxes measures the volume of
operating profit before interest and taxes for each
sales monetary unit, the net profit margin is a
general measure of management efficiency in
production, selling, and financing activities, the
return on equity measures the return on each
monetary unit invested by the owners, and the return
on assets expresses the profit resulting from the
investment of each monetary unit in assets, [17 ].
2.3 The Relationship between Financial
Leverage and Profitability
Financial leverage, or equity trading as it is
sometimes called, refers to the extent of the
borrower's ability to achieve an increase in the
return on equity through borrowing and directly
affects the capital structure of the company and thus
reduces the company's ability to pay its financial
obligations for others, it may also require the
company to reduce its expenses, especially in the
field of research and development, which may affect
negatively on the competitive position of the
company and its production efficiency in the future,
[6].
Financial leverage represents the change that
occurs in return available to the owners, that is, the
net profit after tax or the earnings per share as a
result of a certain change in the net profit before
interest and taxes, as the financial leverage arises
from the presence of fixed financial costs
represented in the interests of loans and preferred
stock dividends, and with the stability of other
factors as they are, and the degree of financial
leverage increases whenever the fixed financing
costs increase, which means a change at a certain
rate in net profit before interest and taxes entails a
greater change in the net profit after tax and interest
that represent the net profit available to the owners
or the earnings per share, [18].
The study of [19], dealt with the impact of
financial leverage on the profitability of Saudi
transport sector companies, the study used three
indicators to measure financial leverage (total assets
to equity, total debt to total assets, and long-term
debt to equity) as independent variables and return
on assets as a dependent variable, and found a
statistically significant relationship between
financial leverage and profitability in Saudi
transport companies, and recommended paying
attention to the use of financial indicators because of
their advantages in evaluating and the company’s
financial conditions, while, [5], study examine the
relationship between financial leverage and
financial performance in telecommunications
companies in the Kingdom of Saudi Arabia, It
concluded that financial leverage negatively affects
financial performance, and that there is a strong
negative correlation between financial performance
and financial leverage and it recommended the need
for Saudi companies to study and evaluate their
financing structure in order to reach the best ratio of
financial leverage in order to achieve a positive
impact of financial leverage on their financial
performance, [20], study examined the impact of
financial leverage on the return on equity and the
overall risks industrial companies in Egypt, and it
found a positive and significant effect of the degree
of operational leverage and the degree of financial
leverage on the return on equity and the total risks
of industrial companies, while found negative and
significant effect of the degree of financial leverage
and the financing mix in the long term on the return
on assets of industrial companies, [6], study looked
at the impact of financial leverage on financial
performance expressed as both the return on equity
and the return on the assets in the Jordanian public
shareholding companies listed in the Amman Stock
Exchange and concluded that there is an effect of
financial leverage on the return on assets also the
absence of an effect of financial leverage on the
return on equity among the different sectors, and it
also concluded that there is no effect of financial
leverage on the return on assets between the
different sectors, and recommended companies to
search for factors that could have an impact on the
return on assets, [10], studied the effect of financial
leverage on financial performance in Jordanian
commercial banks during the period (2000-2016),
and it concluded that there is a significant effect of
financial leverage on the rate of return on assets, and
the presence of a negative and significant effect of
the financial leverage on the return of the ordinary
share, and the existence of a positive and significant
effect of financial leverage on the market value of
the share in commercial banks.
[9], studied the effect of return on assets,
financial leverage, on return on shareholders' equity
in light of the application of ABC the costing
system, and conditions of financial instability, and it
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is a case study for Jordan Steel Company and its
subsidiaries (2003 – 2013) the study used a multiple
regression model, It found that there is statistically
significant effect for the global financial crisis on
the return on equity, it recommended that the
company should maintain a positive and harmonious
relationship between the return on assets and reduce
the debt ratio due to the negative impact of financial
leverage on financial performance.
[21], study examined the effect of financial
leverage on the return on investment for Kuwaiti
public shareholding companies listed on the Kuwait
Stock Exchange during the period (2009-2011), the
study used the simple regression analysis test, the
analysis of variance test (ANOVA), the Scheffee
test, and concluded that there is a statistically
significant positive relationship between the
financial leverage ratio and the return on investment
ratio, the study recommended that Kuwaiti public
shareholding companies should search for the
optimal capital structure that help them achieves the
desired goal of financial leverage.
[22], studied the impact of financial leverage on
financial performance and stock risks; financial
leverage was measured by the ratio of liabilities to
equity, and the ratio of indebtedness, return on
equity and earnings per share were used as
dimensions of financial performance, it concluded
that there is a positive impact of financial leverage
measured through the ratio of liabilities to equity on
each of the financial performances, and the presence
of a negative effect of financial leverage measured
the ratio of indebtedness on financial performance
measured by the return on equity, and the presence
of a positive impact of financial leverage measured
by the indebtedness ratio on share market risks, and
the study recommended conducting more studies on
the impact of financial leverage on profitability
using other financial ratios, [23], studied the impact
of capital structure on financial performance, using
the ratio of liabilities to equity as an indicator of
capital structure or financial leverage, and each of
the return on equity ratio, earnings per share, return
on assets as indicators of performance financial, the
study concluded that there is a positive impact of the
capital structure on the financial performance, and
recommended that companies should use the
optimal financing capital structure because of its
positive impact on the financial performance of
companies, [24], discussed the effect of capital
structure, the company size and liquidity listed on
the Nairobi Stock Exchange and found the existence
of a statistically significant negative relationship
between financial leverage and financial
performance, and the existence of a positive
relationship between each of the company's size and
liquidity separately and financial performance, the
study recommended that the companies should use
the minimum level of debt or determine the optimal
level of debt that should be used, [25], study discuss
the relationship between financial leverage and
financial performance of banks in Nigeria, It tested
the impact of the ratio of debt to equity on the ratio
of return on equity in Nigerian banks, it concluded
that there is a statistically significant relationship
between the ratio of debt to equity and financial
performance measured by return on equity, the
study result showed that there is no statistically
significant relationship between the debt ratio and
financial performance, It recommended that there is
a need for banks to adopt a level of financial
leverage that enhances the banks performance.
[26], examined the hypothesized effect of
financial leverage on the value of companies, where
the financial leverage was measured by the ratio of
long-term debt to total capital and the ratio of total
debt to total capital; the study used the percentage of
sales growth, the size of the company, and the
structure of assets as control variables and found
that there is a negative effect of the level of financial
leverage on the value of companies registered in the
Amman Stock Exchange included in the study
sample.
It is observed from reviewing previous studies
that have addressed the study subject that they fall
into two main groups. The first found a positive
effect of financial leverage on profitability,
including studies of [6], [9], [22], [26], and finally,
the study of [23]. The second group found a
negative impact of financial leverage on a
company’s profitability, such as studies of [25] and
[10]. Some studies have also examined the impact
of financial leverage on profitability and other
aspects. For instance, the study of [20], discussed
the effect of financial leverage on Return on Assets,
Earnings per Share, and Market Value of Shares. It
concluded that there is a negative impact of
financial leverage on Return on Assets and Earnings
per Share, but a positive impact on the Market
Value of Shares. The study of [5], examined the
effect of financial leverage on profitability measured
by return on equity, Return on Assets, and the
overall risks of the company, finding a positive
impact on return on equity and a negative impact on
Return on Assets and the overall risks of the
companies.
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3 Methods and Procedures
3.1 The Study Methodology
The descriptive-analytical method was used in
conducting the study, which is considere d the most
suitable method for the nature of the study.
Reviewing previous studies on the study subject and
their findings were used to define the theoretical
framework of the study and construct its model.
Data for the study was collected from the financial
statements of companies representing the study's
sample. The Statistical Package for Social Sciences
(SPSS) was utilized for data analysis. Descriptive
measures such as the mean and standard deviation
were used to describe the study's data. To test the
study's hypotheses, simple regression analysis was
employed to examine the impact of the independent
variable (financial leverage) on the dependent
variable (profitability) in terms of Return on Assets
and Return on Equity.
3.2 The Study Population and Sample
the study population consists of the industrial
companies listed on the Securities Depositary
center, which is (55) companies according to the
data published on website of the Securities
Depositary Centre, [27], as for the study sample,
consisted of all industrial companies for which the
study data were available for the entire period of the
study that are (39) companies. Thus, the study
sample represents 71% of the industrial companies
listed in the Securities Depositary Centre.
3.3 The Statistical Methods used in the Study
The study used descriptive statistical measures such
as the mean, and standard deviation to describe the
data and the simple regression analysis to test the
study's hypotheses.
4 Statistical Analysis and Hypothesis
Testing
This chapter analyzes the data descriptively to
identify the descriptive characteristics of the study
data such as the mean and standard deviation and
inferentially to test the study's hypotheses.
4.1 Descriptive Analysis
The study data were analyzed to find the main
descriptive statistics indicators that are shown in
Table 1.
Table 1 shows the descriptive statistics indicators'
values that describe the industrial companies'
performance in the Amman Stock Exchange, by
reviewing the table data related to the financial
leverage variable, which represents the independent
variable, it is clear that the lowest value of this
variable amounted to (0.02), and the largest value is
(99.83). The mean set of values for this variable is
(15.54 ± 25.56). Concerning the data of the return
on equity variable, it is found that the lowest value
for this variable is (-17.30), while the largest is
(20.91), and the value of the mean for this variable
is (2.44 ± 7.13); as for the return on assets variable,
it is noted that the lowest value (-11.29), while the
largest value for it is (14.14), the mean set of values
for this variable is (1.20 ± 4.77).
The table also shows the values of two
important indicators of descriptive statistics, namely
the torsion coefficient and the flattening coefficient,
which describe the shape of the distribution of data
for each of the study variables and how close the
behavior of this data is to the default natural data
behavior, as the torsion coefficient describes the tail
of the curve of the data in terms of its warp the
results of this indicator, which indicate that the
degree of torsion is close to the normal distribution,
are accepted if the torsion coefficient falls within the
range (-3 to +3), in the case of using raw data in
estimating and calculating the value of this
indicator, it is noted from the table that the values of
the torsion coefficient for the three variables fall
within the acceptable range, and this indicates that
the data is characterized by a normal distribution of
the three variables its simplicity so that the best
values for this indicator are assumed not to exceed
the limit (8) and by reviewing the data for this
indicator contained in the table above, it is noted
that the values of this indicator ranged between
(1.72-0.56) for the three variables and all of them
fall within the natural limits of this indicator, and
therefore it is concluded that the distribution of the
data of the three variables approximates the normal
distribution, and in the same context, the values of
the flattening coefficient ranged between (2.03-
1.17) for the three variables.
The above descriptive analysis results showed
that the data is fulfilling the normal distribution
condition so the linear regression analysis can be
used to test the study hypotheses.
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Table 1. Descriptive statistics for the study data variables
Table 2. The results of the simple linear regression analysis impact on the degree of financial leverage on the
return on assets (ROA) in Jordanian industrial companies
Sig f
F
R2 modified
R
the independent variable
0.465*
0.539
0.006
0.083
The degree of financial leverage
(*) indicate there is no statistically significant effect
Table 3. The impact of the degree of financial leverage on the return on assets (ROA)
Constant
Sig t
T
β
SE
B
the independent variable
1.097
.465
.734
.083
.524
.385
The degree of financial leverage
Table 4. The results of the simple linear regression analysis of the effect of the degree of financial leverage on
the return on equity (ROE)
Sig f
F
R2 modified
R
the independent variable
0.042*
4.296
0.041
0.231
The degree of financial leverage
Table 5. Values of the impact of the degree of financial leverage variable on the return on equity variable
constant
Sig t
T
Β
SE
B
the independent
variable
2.052
.042
2.073
.231
.780
1.616
The degree of
financial leverage
(*) indicates that there is a statistically significant impact.
4.2 Study Hypotheses Testing
This section of the study addresses the testing of its
hypotheses using simple regression analysis. After
confirming that the study's data approximates a
normal distribution, thus validating the use of
simple regression analysis to test the study's
hypotheses, based on the results of testing the
subsidiary hypotheses, a judgment was made on
accepting or rejecting the main hypothesis. Below is
a presentation of the results of the subsidiary
hypotheses and their implications for the main
hypothesis of the study.
Main hypothesis H0: There is no significant
impact of the degree of financial leverage on the
profitability of the Jordanian industrial
companies listed in the Amman stock exchange
in light of the Corona pandemic, two sub-
hypothesis are derived from the main hypothesis,
the result of testing the first sub hypothesis support
the main hypothesis while the result of testing the
second sub hypothesis was contradicted it, thus, it
can be said that this hypothesis is partially accepted,
and the following are the results of testing the two
sub-hypothesis:
First sub-hypothesis:
H01: There is no statistically significant impact
at the level of statistical significance (0.05 ≥ α)
for the degree of financial leverage on the
return on assets (ROA) in the Jordanian
industrial companies listed in the Amman
Stock Exchange in light of the Corona
pandemic.
In the Table 2 are the results of this hypothesis's
simple linear regression analysis. The results in
Table 2 indicate that the value of the determination
coefficient for the regression model that examines
the impact of the degree of financial leverage on the
return assets (ROA) shows that there is a
statistically significant effect of the degree of
Variables
Views No.
lowest value
biggest
value
Mean
standard
deviation
torsion
modulus
Flattening
coefficient
Financial Leverage degree (Liability/Equity )%
78
0.02
99.83
15.54
25.56
1.72
2.03
ROE% return on equity
78
-17.30
20.91
2.44
7.13
0.62
0.87
ROA% return on assets
78
-11.29
14.14
1.20
4.77
0.56
1.17
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financial leverage on the return assets (ROA), which
amounted to (R2) (0.007). The table shows that the
calculated value of (f) is (0.539), this amount is
considered insignificant because the significant
level is (0.465) is higher than (0.05).
Table 3 shows the value and nature of the
impact of the degree of financial leverage on the
return on assets in industrial companies during the
Corona pandemic.
The Table 3 shows the value of the coefficient β,
which reflects the impact of the variable of the
degree of financial leverage on the variable return
on assets (ROA) is (0.083), and the test significance
level is (0.465) which greater than (0.05) this
means that there is no statistically significant
impact of the degree of financial leverage on
return on assets (ROA).
Accordingly, the null hypothesis of the first sub
hypothesis is accepted, and the alternative one is
rejected, which means there is no impact of the
degree of financial leverage on the return on
assets (ROA) in the industrial companies listed in
the Amman stock exchange during the
coronavirus pandemic.
The second sub-hypothesis:
H02: There is no statistically significant impact
at the level of statistical significance (0.05 ≥ α)
of the degree of financial leverage on the return
on equity (ROE) in the Jordanian industrial
companies listed on the Amman Stock
Exchange in light of the spread of the Corona
pandemic.
Table 4 shows the results of this hypothesis's
simple linear regression analysis. The results in
Table 4 indicates that the value of the determination
coefficient for the regression model that examines
the effect of the degree of financial leverage on the
value of return on equity (ROE) indicates that there
is a statistically significant impact of the degree of
financial leverage on the return on equity (ROE)),
where the value of the determination coefficient (R2)
was (0.054) and the (f) calculated value is (4.296)
and this amount consider statistically significant
because the significant level for calculated (f)
is(0.042) which is less than (0.05).
Table 5 is the value and nature of the impact of
the variable of the degree of financial leverage on
the return on equity. Table 5, revealed the value of
the β coefficient, which reflects the effect of the
degree of financial leverage on the return on equity
variable, as the value of this impact was (0.231); the
t-test value also shows that the statistically
significant linear significance of the coefficient (β)
that was reached, and since the value of the test
significance level of (0.042) was less than 0.05, this
means that there is a statistically significant
impact of the degree of financial leverage on the
return on equity.
Based on the above result, the null of the second
sub-hypothesis of the study is rejected, and the
alternative one is accepted.
5 Results and Recommendations
5.1 Results
The study found the following results. The study
aimed to identify the impact of financial leverage on
profitability, measured by both Return on Assets
(ROA) and Return on Equity (ROE), in the
industrial companies listed on the Amman Stock
Exchange in Jordan. For this purpose, the research
problem was formulated as a main question, two
sub-questions were derived from the main question.
To answer these questions, a main hypothesis was
formulated, from which two sub-hypotheses also
emerged. The following presents the results of
testing the study hypotheses and answers to its
questions:
1 .Impact of financial leverage on the
profitability of industrial companies listed in
the Amman Stock Exchange.
The main hypothesis states that "there is no
statistically significant impact of the degree of the
financial leverage on the profitability of Jordanian
industrial companies listed in the Amman stock
exchange during the COVID-19 pandemic." The
results of testing the sub-hypotheses derived from
the main hypothesis indicated no clear direction of
the impact of financial leverage on profitability in
general for industrial companies listed in the
Amman Stock exchange during the COVID-19
pandemic. The study found no significant effect of
the degree of the financial leverage on Return on
Assets, but there was a significant effect of the
degree of financial leverage on Return on Equity.
Therefore, the main hypothesis can be partially
accepted, meaning it is not possible to judge the
impact of the degree of financial leverage on the
profitability of industrial companies listed in the
Amman stock exchange during the COVID-19
pandemic.
2 .Impact of the degree of the financial leverage
on the profitability of industrial companies
listed in Amman stock exchange measured
by Return on Assets :
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The results related to the first sub-hypothesis, which
states that "there is no statistically significant impact
at the level of significance(0.05 ≥ α) of the degree of
financial leverage on Return on Assets (ROA) for
Jordanian industrial companies listed on the Amman
Stock Exchange during the COVID-19 pandemic,"
led to the acceptance of this hypothesis. The
significance level was (0.465), which is greater than
the significance level used in the study (0.05 ≥ α).
Hence, the alternative hypothesis was rejected, and
the null hypothesis, which states no effect of the
degree of financial leverage on profitability
measured by ROA, was accepted. The researcher
believes this can be explained by the fact that
Jordanian industrial companies did not optimize the
use of their assets to generate profits during the
study period (the spread of the COVID-19 crisis).
An increase in the ROA indicates management's
efficiency in using assets and generating profits. The
inefficiency in using assets by industrial companies
during the COVID-19 period might be justified
since many companies were forced to suspend their
operations for extended periods. When they
resumed operations, they did so gradually and with
less than their full production capacity.
The results of testing the first sub-hypothesis align
with the study, [6], which indicated no impact of
financial leverage on financial performance
measured by Return on Assets (ROA). Conversely,
a study of [10], highlighted a negative and
significant effect of the degree of the financial
leverage on the Return on Assets (ROA) in
commercial banks. Additionally, the study [25],
pointed to a negative impact of the degree of
financial leverage on firm value. However, these
findings differ from the results of a study [23],
which suggested a positive effect of capital
structure, measured by the debt-to-equity ratio, on
Return on Assets.
3. Impact of degree the financial leverage on
profitability measured by the Return on
Equity (ROE):
The results related to the second sub-hypothesis,
which states that "there is no statistically significant
impact at (0.05 ≥ α) level of significance of the
degree of financial leverage on Return on Equity
(ROE) for Jordanian industrial companies listed on
the Amman stock exchange during the COVID-19
pandemic," led to the rejection of the null
hypothesis and acceptance of the alternative
hypothesis, indicating a statistically significant
effect of the degree of financial leverage on ROE
with a significance level of (0.00), which is less than
the significance level used in this study(0.05 ≥ α).
This suggests that the industrial companies listed in
the Amman stock exchange managed to invest
borrowed funds to achieve returns higher than the
borrowing cost, providing an additional return to
equity holders. One possible explanation could be
that creditors reduced interest rates due to the
COVID-19 pandemic. Additionally, the Central
Bank introduced programs to support economic
sectors during the pandemic, mainly by reducing
interest rates on certain types of loans and
increasing the ceiling of some financing forms
provided to sectors affected by the pandemic,
including the industrial sector. Furthermore, some
sub-sectors of the industry, such as the
pharmaceutical and food industries, benefited from
halted imports and increased demand for local
products, which reflected positively on their
financial performance.
The results of testing the second sub-hypothesis
align with the result of the study [20], which
indicated a positive and significant effect of
operational leverage and financial leverage on
Return on Equity, as well as the study [6] and [20]
which suggested an effect of financial leverage on
financial performance measured by Return on
Equity in Jordanian public shareholding companies.
while a study of [25], pointed to a strong
relationship between debt to-equity ratio and
financial performance measured by Return on
Equity. Additionally, a study of [23], indicated a
positive effect of capital structure, measured by the
debt-to-equity ratio, on Return on Equity.
5.2 Recommendations
Based on the study findings, the study recommends:
1. Industrial firms should find the optimal capital
structure so that the financial leverage can
positively impact the profitability of these
companies.
2. Due to the unclear impact of financial leverage
on Industrial firms’ profitability in Jordan, they
should depend on internal financing sources
such as retained earnings, reserves, etc. as much
as they can to avoid paying fixed financing
costs on borrowed funds.
3. Carry out the necessary feasibility studies for
the investment opportunities to ensure that there
is a higher expected return than the cost of
financing them so that the financial leverage can
achieve its optimal objectives.
4. There is a need for more studies to compare the
degree of financial leverage impact on the
profitability of Jordanian industrial firms pre
and post the Corona pandemic.
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Acknowledgments:
The author is grateful to the Middle East University,
Amman, Jordan, for the financial support granted to
this research project.
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
The authors equally contributed in the present
research, at all stages from the formulation of the
problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
Middle East University support the research
financially by reimbursing the researchers the
publishing fees upon acceptance and publishing the
paper.
Conflict of Interest
The authors have no conflicts of interest to declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
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DOI: 10.37394/23207.2024.21.55
Nawaf Abdallah Aljundi,
Ahmad Bani Ahmad, Anas Ahmad Bani Atta
E-ISSN: 2224-2899
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Volume 21, 2024