Capital Structure and Firm Value Relationship: The Moderating Role of
Profitability and Firm Size Evidence from Amman Stock Exchange
TAREQ MOHAMMAD AlMOMANI1, MOHAMMED IBRAHIM SULTAN OBEIDAT1,
MOHAMMED ABDULLAH ALMOMANI1, NADEEN “MOHAMMED ADNAN” “M.Y” DARKAL2
1Accounting Department, Jadara University, Irbid,
JORDAN
2Department of Business Administration, Jadara University, Irbid
JORDAN
Abstract:-The study objects for determining whether there is an impact of financial leverage in the capital structure
on firm market value, and to determine whether profitability and size of firms play a moderating effect role on the
impact relationship of financial leverage on firm market value. The cluster sampling method is used in the selection
of the sample among the listed firms at Amman Stock Exchange, where the utility-energy and the food-beverage
listed firms are the two cluster, which is selected to constitute the sample. The secondary data covering the period
2011-2020, of the entire listed 5 utility-energy and 8 food beverage firms, had collected and used in the analysis
and hypotheses testing. Tobin;s Q is used as an indicator for firm value, and debt ratio is used as a measure of debt
in the capital structure mixing. Profitability is measured through the return on assets ratio, while the natural
logarithms of total assets is used as a measure for firm size. Using the regression method, the study shows that debt
in the capital structure has insignificant impact on firm value, while the results demonstrate that profitability and
firm size, each of which, plays a moderating effect role in the effect relationship of debt in the capital structure, on
firm market value.
Key Words: - Capital Structure, Financial Leverage, Debt Ratio, Return on Assets, Firm Size, and Tobin’s Q.
Received: October 8, 2021. Revised: July 9, 2022. Accepted: August 11, 2022. Published: August 29, 2022.
1 Introduction
Two sources are available for financing business
organizations, equity and debt, no more. Equity
includes the contributions by shareholders, and the
accumulated unpaid profits, or what is called retained
earnings, while debt is attributed to creditors, and
consisting of short and long-term liabilities. The firm
financing decision is one among the most important
decisions, because of its possible long-term effects on
firm performance, profitability, liquidity, and may be
the firm value. Normally, firms depend on a mix of
equity and debt in its capital structure, where this mix
may lead to cost increase or cost reduction, and
therefore affects the profitability, and thereafter, it
may influence the firm value [10].
The theorem of Modigliani and Miller (1958),
was the starting point in the context of capital
structure, where the theorem has two propositions.
The first proposition states that firm value is
irrelevant of debt-equity mixing in capital structure.
The second proposition of Modigliani-Miller theorem
states that firm value is also irrelevant of the adopted
dividend policy by the firm, so the payout ratio does
not affect firm value [15]. These two propositions
refer that firm value is not affected by financing
decisions, nor by the dividend policy.
The current study focuses on firm size and
profitability as potential moderating factors having
interaction effects on the assumed effect relationship
of capital structure on firm value. Firm value is an
important indicator for investors, whether these
investors are current or potential shareholders. Firm
value is of great importance for investors, where
investors normally prefer to invest more in firms with
an increasing firm value. Financial leverage in the
capital structure of business organizations may affect
firm value, since financing is costing, where the
chosen mix of debt and equity affects the cost of
financing. The impact of capital structure had been
enough investigated, but whether firm size and
profitability moderate the impact of capital structure
on firm value, is still ambiguous and no enough
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DOI: 10.37394/232015.2022.18.102
Tareq Mohammad Almomani,
Mohammed Ibrahim Sultan Obeidat,
Mohammed Abdullah Almomani,
Nadeen Mohammed Adnan M.Y Darkal
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research investigated this assumed moderating
impact. In addition, a contradiction exists in the
findings of the studies that investigated the capital
structure impact on firm value. Some prior research
found that capital structure has a positive impact on
firm value such as, Dang and Do [7], and
Aggarwal1and Padhan [3]. In opposite, others found
a negative impact of financial leverage in the capital
structure, on firm value, as of, Luu [14], and
Doorasamy [8]. In the other hand, some prior
research found that capital structure has no impact on
firm value, as of Abdallah and Hussein [1].
The relationship between capital structure and
firm value is still ambiguous and needs more
illustration and determination. Actually, no enough
prior researchers studied this relationship, and
illustrated whether firm size and profitability
moderate this relationship, and this issue is still
questionable. Firm value also has effects inside the
firm and the management of firms, and some
decisions of managements depend, to a large degree,
on firm value.
Investors and creditors prefer investing in
investments that are expected to generate high rate of
return. They normally consider many financial
indicators whenever they are required to take
investment or credit decisions, among these is the
firm market value, since the increase in firm market
value is a part of share rate in addition to dividends.
A temporary increase in market value is confusing,
and decisions should be based on permanent steady
rate of increase. Whether the increase in firm value is
temporary or permanent, is based on several
indicators, including the firm capital structure. The
equity-debt mix in the capital structure is important
to be taken into consideration by users, because it
may be related to the change in firm value. Moreover,
the mix of short or long-term debt may be related to
firm value. In addition, managements are required to
take the decision which are most likely will lead to
higher market value. As a result, managers of firms
should consider the possible effects on firm value,
whenever a decision is required to be taken, and will
lead to an increase in the capital structure. Firm size
and profitability of firms are better to be considered
by managers in this context, because the appropriate
capital structure of small or medium-sized firms may
be inappropriate for large-sized firms. Based on this
discussion, the problem of the study is better
expressed through the following two questions. Does
financial leverage in the capital structure affect the
market value of utilities-energy and food-beverage
listed firms at Amman Stock Exchange (ASE)? Do
firm size and profitability of business organizations
moderate the assumed effect of financial leverage in
the capital structure on firm value?
The current study seems important, at least by the
standpoint of its authors. The idea of the study and
the findings that this study will lead for, are
important for managements of firms and for the
different groups of users of financial information.
Based on the findings, managers of firms will not
neglect the effects on firm value, whenever a decision
is under discussion, and will be aware of the different
effects on firm value as a result of capital structure
decisions. Moreover, investors and creditors will find
that they have to consider the composition of capital
structure, and the possible effects of that decision on
firm value, since the increase in firm value is an
increase in the rate of investment.
There are two main objectives of the study. First,
to investigate whether the nature of capital structure
mixing affects the market value of listed utilities-
energy and food-beverage firms at ASE. Second, the
more important objective is to determine whether
firm size and profitability of business organizations
moderate the assumed effect of capital structure on
firm value. In addition, the study is an attempt since
it adds more to the available literature regarding the
relation between capital structure and firm value,
including the interaction moderating effect of firm
size and profitability.
The remaining of the study is organized to be as
follows. Section 2 introduces the literature and the
related prior researches, and the hypotheses of the
study are shown in section 3. Section 4 shows the
methods followed in the study, and the methods of
data analysis and hypotheses testing, whereas chapter
5 presents the analysis and discussion, and the
findings and conclusions are revealed in section 6.
2 Literature Review and Prior
Research
Investors and shareholders are strongly interested
with firm value, and they pay enough attention to
market value. Firm value is normally associated with
share market price, and reflects the perception of
investors regarding the firm [12]. Several measures
or financial ratios can be used as indicators or
measures for firm value. Actually firm value refers
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for the share price relation with profitability, or with
share book value. Brigham and Houston (2011),
stated that price earnings ratio, price book value ratio,
market book ratio, dividend yield ratio, and dividend
payout ratio, each of which, can be used as a good
indicator for firm value.
The composition and decision of firm capital
structure is an important issue for the success of
business organizations. Capital structure is defined in
different ways. For instance, Gitman and Zutter [9],
define capital structure as the mix of long-term debt
and equity maintained by the firm. In addition,
Parmasivan & Subramanian [19], stated that the term
capital structure refers for the relationship between
the different long-term sources of firm financing
including equity capital, debt capital, and preference
shares. Capital structure can also be defined as the
entire resources used in financing the assets of firms.
It can be also defined as the mix of equity and debt
used in funding business organization.
The Modigliani and Miller theory (1958), stated
that firm value is independent from capital structure
under perfect capital market, where under a perfect
capital market no asymmetric information, no taxes,
no transaction cost, and no cost associated with
bankruptcy [4] The theory means that the expected
cash flows determines the firm value. Five years after
the issuance of proposition 1 of Modigliani-Miller
theorem, these authors issued proposition 2 in 1963,
which took tax into consideration, where tax is
ignored in proposition 1. Based on proposition 1 of
Modigliani-Miller (1958), the value of a levered firm
is the same as of an unlevered one. When proposition
2 issued in 1963, and tax is taken into consideration,
using leverage in the capital structure became
beneficial for firms because borrowed money
decreases the income tax payable, and as a result,
mixing leverage and equity became attractive and
beneficial.
Next to the second proposition of Modigliani-
Miller (1963), two theories were developed regarding
the relationship between capital structure and firm
value. The trade-off theory stated that using debt in
capital structure is beneficial to business
organizations, because using more debt in capital
structure leads to tax benefits. Underline the trade-off
theory, managements of firms prefer using more debt
in its capital structure, and firms management are
required to make a balance between the tax benefits
and the cost of borrowed capital. Balancing between
tax shield and cost of debt enables firms to achieve
the optimal level of debt, in the debt equity mixing.
In occasion, despite that the trade-off theory explains
the differences in debt-equity financing in different
firms, but it does not explain the differences in this
mix of debt equity in the same firm [11].
Myers and Najluf [17], developed the pecking
order theory, where according to this theory, firms
can generate more funds that was divided into debt
and equity, and when a firm complies with a pyramid
of financing sources, it prefers equity financing when
it is available, while debt financing is preferable over
equity when external financing is required. In this
context, Shyam-Sunder and Myers [22], stated that
firms determine debt level in its capital structure
through a type of comparison between the benefits
and cost of debt, where the optimal level of debt is
reached when the marginal present value of interest
tax shield equals the marginal present value of
financial distress cost.
Business organization are required to choose the
optimal capital structure, but unfortunately, no
equation or rule can be followed or applied to achieve
the optimal capital structure. The optimal capital
structure is the mix of equity and debt where the cost
of financing is at its minimum possible level, where
this leads to the maximum possible firm value.
Aljamaani [4], stated that the optimum capital
structure is the capital structure at which the
weighted average cost of capital is at the minimum,
and thereby the value of the firm is at maximum.
The entire listed items in the right-hand side of
the statement of financial position constitute the
capital structure, which can be classified into equity
and liabilities. Equity includes ordinary shares,
preference shares, retained earnings, in addition to
the premium to ordinary shares and preference
shares. When the firm has treasury shares, the value
of these treasury shares is deducted from equity. With
regard to debt, it normally includes current liabilities,
bonds payable, long-term notes payable, and long-
term loans, which is required to be settled along a
period of more than one year.
In fact, capital structure is affected by several
factors, where some of these are internal, while
others are external. More debt in the capital structure
leads to more interest, and therefore the firm ability
to pay these interests will decline, which thereafter
leads to more risk. In addition, more debt in capital
structure means less firm ability to receive additional
borrowing, and therefore less flexibility in the capital
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structure. Interest rate is an important factor affecting
the capital structure. Interest rate for bonds fluctuate
along time, and when firms find that interest rate
became high or increased, most firms switch to
equity financing or to short-term debt. Tax policy
affects the capital structure. Normally, interests are
deducted from profits in an early stage, and leads to
less taxes, or what is called tax shield, whereas
dividends are paid later and normally within the next
accounting period, and therefore it does not lead to a
reduction in the taxable income, which may make
debt more preferable over equity because it is less
costing. The general level of business activities also
affects the capital structure. When the general level
of business is rising, firms will try to issue more debt
and more equity securities, whereas when the general
level of business is slacking, firms may use some of
its available cash to pay debt securities or to acquire
some of its outstanding equity securities [20].
Financial managers should struggle for achieving
the most appropriate capital structures. The most
appropriate capital structure can be achieved when
the cost of capital is at the minimum and earnings per
share at the highest. Using more debt in the capital
structure leads to a reduction in liquidity and
solvency, since more debt needs for interests. The
appropriate capital structure maintains flexibility, and
therefore more future ability to borrow, and at the
same time, higher ability to settle or pay some of the
outstanding debt. In addition, a firm should keep
control over debt, where debt should be maintained
within the limits of payment ability.
Business organizations should make enough
effort to choose the optimal capital structure. The
optimal capital structure is the mix of equity and debt
which leads to the minimum cost of capital, and
maximum firm value, and hence, the highest possible
wealth for shareholders. Nevertheless, the following
considerations are required to be taken into
consideration whenever firm value maximization is
the main goal for firms [20].
1. Debt is required to be adopted when the cost of
borrowing is less than the expected rate of return
for investment. In this case, the excess of rate of
return over cost of capital, leads to higher firm
value.
2. Using debt in capital structure leads to less
income tax, because interest expenses are
deducted from taxable income. This is called the
income tax shield.
3. Using more debt leads to higher risk, therefore,
firms are advised to use more debt, when it does
not lead to higher risk.
4. Firms are required to maintain flexible capital
structure, where firms can pay a portion of debt
or can acquire some of its outstanding shares.
Luu [14], investigated the impact of capital
structure of listed chemical firms at Stock Market of
Vietnam. The main objective of the study was to
determine whether the nature and composition of the
capital structure affect the value of chemical firms.
Secondary data covering the period 2012-2017, of the
entire listed 23 chemical firms had collected and used
in the analysis and hypotheses testing. Tobin’s Q is
used to represent firm value as the single dependent
variable. A single independent variable is taken into
consideration, and had tested in their impact on firm
value in the study. The ordinary least square method,
in addition to other methods, were used in data
analysis and hypotheses testing. The study showed
that an inverse relationship exists between capital
structure and firm value, where in more details, firm
value declines by the increase of debt proportion in
the capital structure. Moreover, the study found that
when firms have greater asset turnover, firm size, and
number of years the firm have in operations, firms
have less market value.
Doorasamy [8], had an important contribution in
the potential effect relationship of capital structure on
firm value. The objective of the study was to examine
the relationship between capital structure and firm
value of the East African countries, and to show how
managerial ownership affects this relationship. The
secondary data covering 10 years, from 2009 to 2019,
of 65 listed firms of Nairobi, Dar Es Salam stock
Exchange, and Uganda Stock Exchanges, had
collected and used in the analysis and hypotheses
testing. The study employed the Generalized Method
of Moments, as an estimation approach, and the
multiple linear regression method had used in data
analysis and hypotheses testing. One important
findings of the study is that leverage has a significant
impact on firm value, and that managerial ownership
has a significant inverse relationship on the effect
relationship of leverage on firm value.
Dang and Do [7], carried out a study with the
purpose of investigating whether capital structure and
other indicators affect the value of firms of Vietnam.
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Mohammed Abdullah Almomani,
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To achieve the objective of the study, the authors
collected secondary data covering the period 2012-
2012, of 435 listed nonfinancial firms at Vietnam
Stock Exchange. The sample of firms includes 4
different industries. Several findings the study led
for, but the most important conclusion is that there is
a positive significant impact of capital structure on
firm value in firms of food-beverage industry, and
negative significant impact on the value of wholesale
trade and construction firms, as well as real state
firms. The results also revealed that there is no
significant impact of capital structure on the value of
firms when the entire industries are taken together as
one group.
Abidin et al [2], attempted to determine the
impact of short-term debt, long-term debt, and total
debt to total assets, on firm value. Return on sales,
and revenue growth, were used as control variables.
To achieve the objective of the study, the secondary
data covering the period 2015-2018, of a sample
consisted of 15 out of 27 listed consumer goods firms
and food and beverage sub-sector manufacturing
firms at Indonesia Stock Exchange. Using the
regression method, the results showed that short to
total assets and long term debt to total assets, each of
which, has no significant impact on firm value,
whereas total debt to total assets has a negative
impact on firm value.
The aim of Santosal’s study [21], was to
investigate the moderating role of firm size on the
relationship between firm financial characteristic and
corporate governance from one side, and Islamic firm
value, in the other side. The secondary data available
in the financial statements of a purposive sample
consisted of 110 listed firms at Indonesia Stock
Exchange , covering the period 2013-2018, had
collected from the Indonesia Capital Market Institute,
the Indonesian Capital Market Directory, and
Islamic firm periodically official websites, and
analyzed to achieve the goals of the study. Using the
regression method, the results showed that there is a
significant positive effect of leverage, profitability,
and efficiency on Islamic firm value, while liquidity
and audit committee include no effect. The study
found that firm size has a reinforcing effect of the
different independent variables. Because of the firm
size-moderating role, liquidity and audit became
having significant positive impact on Islamic firm
value.
The objective of Hirdinis’s (2019) study, was to
determine the impact of capital structure and firm
size on firm value, and to identify whether
profitability moderates this relationship. To achieve
the objective of the study, 7 out of 47 listed mining
firms at Indonesia, satisfying the conditions to be
within the study purposive sample, so secondary data
covering the period 2011-2015, of these seven firms,
had collected and used in the analysis. Using the
multiple linear regression method, the results showed
that capital structure has a positive significant impact
on firm value, whereas firm size has a negative
significant effect on firm value. It also reveals that
profitability does not significantly affect firm value,
while firm size has a positive significant effect on
profitability, and profitability does not moderate the
effect relationship of capital structure and firm size
on firm value.
Natsir and Yusbardini (2019), carried out a study
with the aim of investigating the impact of capital
structure on firm value through profitability, where
profitability is an intervening variable. To achieve the
objective of the study, secondary data covering the
period 2013-2017 of 17 public Malaysian firms had
collected and used in the analysis. It is apparent that
firm market value is the dependent variable of the
study, while capital structure is the independent, but
profitability is used as an intervening variable. Using
the multiple linear regression method in addition to
other methods, the results showed that capital
structure significantly affects profitability, and firm
size, capital structure, and profitability, each of
which, has a significant impact on firm value. The
last conclusion of the study is that profitability affects
firm value.
Almahadin and Oroud [5], carried out a study
with the purpose of investigating the role of
profitability on the capital structure with firm value
relationship. Except commercial banks, the secondary
data, covering the period 2013-2017, of the
remaining listed firms at ASE, had collected and used
in the analysis and hypotheses testing. Using the
panel data analysis, and hieratical regression, the
study revealed that there is a significant adverse
relationship between capital structure and firm value.
In addition, results showed that studying the
interaction impact of profitability on capital structure
relationship with firm value, improves the
understanding of the relationship between capital
structure and firm value.
Uzliawati, et al [23], carried out an important
study as an attempt to identify the optimal capital
structure of business organizations. The main
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Nadeen Mohammed Adnan M.Y Darkal
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objective of the study was to examine the impact of
capital structure of the listed manufacturing firms at
Indonesian Stock Exchange on firm value. To
achieve the objective of the study, secondary data,
covering the period 2012-2015, of a sample consisted
of 101 listed manufacturing firms. The ordinary least
square method had used in testing the hypotheses of
the study, and the results showed that the higher the
capital structure with debt to equity ratio and long-
term debt to assets ratio, the higher the firm value,
whereas, the lower the long-term debt to equity ratio,
the lower the firm value. In addition, the study
revealed that there is a significant relationship
between debt to equity ratio and long-term debt to
assets ratio in one hand, and the firm value in the
other hand, whereas a negative relationship exists
between long-term debt to equity ratio and firm
value.
Muigai and Muriithi [16], carried out a study, as
an attempt to determine whether capital structure
affects financial distress of the listed nonfinancial
firms in Kenia, and also to determine the moderating
role of firm size on this effect relationship. Secondary
data covering the period 2006-2015 of the entire
listed 40 non-financial firms had collected and
analyzed. Using the feasible general least square
method for hypotheses testing, the results showed
that firm size significantly moderates the effect
relationship of capital structure on financial distress
of firms. In more details, the results revealed that, in
general, debt has a negative significant impact on
financial distress, but this effect becomes positive by
the increase in firm size.
Aggarwal and Padhan [3], explored attention
with the impact of capital structure of Indian listed
hospitality firms on firm value. In more details, the
objective of the study was to examine whether capital
structure has an impact on firm value of listed
hospitality firms of India. To achieve the objectives
of the study, secondary data covering the period
2011-2015 of 22 hospitality firms, had collected and
used in the analysis. Several variables are taken into
consideration in this study to examine whether each
affects firm value including, firm quality, tangibility,
profitability, size, growth, liquidity, in addition to
some macro variables. This empirical study which
had been carried out through the panel data
techniques, and using the ordinary least square
method, in data analysis and hypotheses testing,
showed that a significant relationship exists between
firm value in one hand, and each of firm quality,
leverage, liquidity, size, and economic growth.
Priya, Nimalathasan, and Piratheepan [20],
carried out a study in Sri Lanka regarding the
relationship between capital structure and firm value.
The main objective of the study was to determine
whether a relationship exists between capital
structure and firm value. To achieve the objective of
the study, the authors collected the secondary data
covering the period from 2007 to 2011 of 20 out of
31 listed manufacturing firms at Sri Lanka. Using
correlation and the multiple linear regression method,
the results showed that capital structure has a
significant impact of firm value ratio, and the equity
ratio has a significant correlation with earnings per
share.
Lixin and Lin [13], investigated the relationship
between debt financing and market value of 272
Chinese listed real state firms at Shanghai Stock
Exchange and Shenzhen Stock Exchange. To achieve
the objectives of the study, secondary data covering
the period 2002-2007 of these firms, had collected
and used in the analysis and hypotheses testing.
Using the multiple regression method in hypotheses
testing, the results showed that increasing debt
financing leads to higher market value.
3 Study Hypotheses
Based on the consideration of the related literature
and prior research, the following hypotheses had
been developed.
Ho1. Financial leverage in the capital structure of the
listed utility-energy and food-beverage firms at
Amman Stock Exchange, does not affect the market
value of these firms.
Ho2. The profitability of the listed utility-power and
food-beverage firms at Amman Stock Exchange does
not moderate the effect relationship of financial
leverage in the capital structure and the market value
of these firms.
Ho3. The size of the listed utility-power and food-
beverage firms at Amman Stock Exchange does not
moderate the relationship between financial leverage
in the capital structure and firm value.
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4 Research Methods
The population of the current study includes the
entire listed shareholding firms at (ASE), where a
cluster sample is used when two clusters are selected
to be within the sample including, the utility-energy
and the food-beverage firms. As a result, the sample
of the study consists of the entire 5 utility-energy
listed firms and the entire 8 food-beverage listed
firms are included in the sample.
There are three types of variables are involved in
the study. Firm value is the single dependent
variable, whereas financial leverage in the capital
structure is the independent variable. The moderating
variables include both of profitability and firm size.
Tobin’s Q is used as a measure of firm value, as the
dependent variable, where it is computed by dividing
the equity market value by the equity book value.
Debt ratio is used as a measure of financial leverage
in the capital structure, as the single independent
variable, where debt ratio is the ratio of total
liabilities to total assets. Return on Assets (ROA) is
used as a measure of firm profitability, where it is the
relation of income to total assets. Natural logarithms
of total assets is used as a measure of firm size.
Two regression methods are used in testing
the hypotheses of the study including the single,
and the multiple linear regression methods.
Therefore, three models are used in the study as
follows.
Model 1
FMV = a + b1DTR + E (1)
Model 2
FMV = a + b1DTR + b2ROA + b3(DTR×ROA) + E
(2)
Model (3)
FMV = a + b1DTR + b2SZE +b3(DTR×SZE) + E
(3)
Where:
a: intersection referring for the value of firm
when the independent variable equals zero.
b1, b2, and b3, each of which refers for the slope
of firm value on the related independent variable.
FMV: firm value, measured using Tobins’ Q
DTR: debt ratio, where it is the relation of total
liabilities to total assets.
ROA: return on assets, or the relation of net
income to total assets.
SZE: firm size, measured by the natural
logarithms of total assets.
All hypotheses are tested following 0.95 level of
confidence, or 0.05 (1-0.95), predetermined
coefficient of significance. Simple regression is used
in testing the first hypothesis, but the multiple linear
regression is used in testing the remaining two
hypotheses. The comparison between the computed
and the tabulated t-value or f-value, and the
comparison between the computed and the
predetermined coefficient of significance, are two
criteria used in the acceptance-rejection decision of
the null hypotheses. Based on the comparison
criterion between the computed and the tabulated t or
f value, the null hypothesis is accepted when the
computed t or f value is less than the tabulated one,
and in opposite, it is rejected when the computed t or
f value exceeds the tabulated. Using the comparison
criterion between the computed and the
predetermined coefficient of significance, the null
hypothesis is accepted when the computed coefficient
of significance is higher than the predetermined one,
and in opposite, the null hypothesis is rejected when
the computed coefficient of significance is less than
the predetermined.
5 Results and Analysis
5.1 Descriptive Statistics
Table (1) shows some descriptive statistics including,
the mean as a good measure of central tendency, and
the standard deviation as a common measure of
variation. In addition, the table presents the
maximum and minimum values of each dependent,
independent, or moderating variable along the period
of the study, that Starting from 2011 and ending on
2020.
Considering the contents of the table, it shows
that the mean of Tobin’s Q equals 6.1582, with
43.748 standard deviation. The mean of debt ratio, as
a measure of financial leverage is 0.4683 with
0.31325 standard deviation. The mean of debt seems
to be high, where a high debt means more risk.
Taking ROA that refers for profitability, the mean of
ROA equals 0.0297 and the standard deviation is
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DOI: 10.37394/232015.2022.18.102
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0.07271. Actually, the profitability of firms seems
low, despite that most of utility-power firms work
with no competition because it is protected through
long-term contracts by the government. The mean of
the natural logarithms of total assets is 17.9521, with
1.66363 standard deviation, where this means that
there are no large differences in firm size among
firms, reminding that the natural logarithms of total
assets is a measure of firm size.
Table 1. Entire Firms Descriptive Statistics
Mean
Maximum
Minimum
Std. Deviation
Tobin’s Q
6.1582
500.13
0.000
43.748
Debt Ratio (DTR)
0.4683
1.00
0.07
0.31325
ROA
0.0297
0.14
-0.46
0.07271
Log. Assets
17.9521
21.31
15.65
1.66363
No. of Observations
130
130
130
130
Table (2) shows a comparable data between
the 5 utility-power firms, and the 8 firms belonging
to food-beverage industry. The table reveals that
there are some large differences between both
industries. For instance, a difference is available in
the mean of Tobin’s Q, where this mean is 3.961,
whereas, it is 7.537 for food-beverages industry.
With regard to the mean of ROA, they seem close to
each other, but there is a notable difference in the
mean of firm size, as measured through Log. assets,
where the mean of the logarithms of total assets of
power-energy firms equals 19.53, while it is 16.963
for firms belonging to food-beverage. The most
important issue, is that utility-energy firms depend on
debt more than equity, while food-beverage firms
depend more on equity. This conclusion is stemmed
the mean value of debt ratio, where it equals 0.667 in
utility-power firms, and 0.344 in food-beverages
firms.
Table 2. Comparative Descriptive Statistics between Utility-Power and Food-Beverage Firms
Utility-Power Industry
Food-Beverage Industry
Mean
Maximum
Minimum
Std.
Deviation
Mean
Maximum
Minimum
Std.
Deviation
Tobin’s Q
3.96
16.74
0.83
3.813
7.54
500.13
0.00
55.78
Debt Ratio
0.67
0.96
0.07
0.318
0.34
1.00
0.08
0.238
ROA
0.030
0.14
-0.12
0.039
0.029
0.14
-0.46
0.088
Log. Assets
19.53
21.31
16.94
1.403
16.96
18.37
15.65
0.851
5.2 Hypotheses Testing
5.2.1 The First Hypothesis
Table (3) shows the significant linear relationship
between debt ratio and firm market value. The table
shows that f-value equals 2.654, and the coefficient
of significance (p-value) equals 0.106. Because the
computed coefficient of significance (p-value), is
higher than the predetermined, which equals 0.05,
and because the computed f-value is less than the
corresponding tabulated one, the null hypothesis is
accepted, whereas its alternative is rejected. The
coefficient of determination (R2) equals 0.020, which
means that the independent variable explains only 2
percent of the variance in firm market value.
Meanwhile, the adjusted R2 equals 0.013.
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Table 3. The Statistics of the first Model
FMV = -3.163 + 19.903 DTR + 43.47018
Variable
Coefficient
Std.
Error
t-Statistic
Sig.
Independent variables
Constant
-3.163
6.876
-0.460
0.646
DTR
19.903
12.218
1.629
0.106
R2
0.020
Adj. R2
0.013
F
2.654
Sig.
0.106
Durbin-Watson
2.00
Table (3) shows that debt ratio, without any
moderating effects is insignificant predictor of firm
market value. The first model, when the coefficients
are solved became as follows.
FMV = -3.163 + 19.903 DTR + 43.47018 (4)
5.2.2 The Second Hypothesis
The second hypothesis had been developed to enable
examining the assumed moderating impact of firm
profitability, as measured by ROA, on the effect
relationship of debt ratio on firm value, as measured
using the Tobin’s Q. The multiple linear regression
model is used in testing this hypothesis. The
statement of the hypothesis is listed again, in null
form, as follows.
Ho2. The profitability of the listed utility-power and
food-beverage firms at Amman Stock Exchange does
not moderate the effect relationship of financial
leverage in the capital structure and the market value
of these firms.
Table (4) shows the results of the multiple linear
regression model. The first model results in R2 of
0.020, which means that that debt ratio only explains
2 percent of the variance in firm market value. The
model shows also that f equals 2.654, which can not
be considered significant. The second model includes
profitability as a moderator variable. With regard to
the second model, R2 increases by 0.758 percent to be
equals 0.778, and the computed coefficient of
significance became equals zero, or a very close
value to zero. Because f-value is greater than the
tabulated, and because the computed coefficient of
significance is less than 0.05, the null hypothesis is
rejected, where instead, its alternative one is
accepted. These results indicate that there is a
significant moderating effect of profitability on the
effect relationship of debt ratio on firm market value.
Actually, when debt ratio is tested to determine
whether it affects firm value, the test showed that
there is no or very low impact of debt ratio on firm
market value. When profitability is taken into
consideration as a moderator between debt ratio and
firm market value, it is shown that debt ratio
significantly affects firm market value. This change
in the result is because of interaction effects between
debt ratio and profitability in one side, and other
interaction effect between profitability (ROA), and
firm market value. The existence of interaction
effects between debt ratio and ROA, and between
ROA and firm value, created an effect between debt
ratio and firm value.
Table 4. Summary of the direct effects and interaction effects
Independent variable
Variables
First model
Second model
Sig
F
Sig
F
ROA
Direct effects
0.106
2.654
Interaction effects
-
0.000
147.087
R2
0.02
0.778
Adj.R2
0.013
0.773
∆ R2
0.758
∆ F
144.433
Sig.
0.000
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Table 5, shows the coefficients of the second
hypothesis. When the coefficients of the second
model are solved, the model became as follows.
FMV = -9.507 + 26.096DTR + 324.578ROA –
1136.751 (DTR×SZE) +
4.387………………………………..……(3)
Table 5. The coefficients of the 2nd Hypothesis
FMV = 29.521 – 31.778DTR – 3339.447ROA + 174.647(DTR × ROA) + 33.66165
Variable Coefficient Std. Error t-Statistic Sig.
Independent
variables
Constant -9.507 4.387 -2.167 0.032
DTR -26.096 6.823 3.825 0.000
ROA
324.758
53.532
6.063
0.000
(DTR×ROA)
-1136.731
74.263
-15.307
0.000
R2
0.778
Adj. R2
0.773
F
147.087
Sig.
0.000
Durbin-Watson
2.725
Based on the results of the test, model 2, which is
concerned with the moderating impact of
profitability, became as follows, when constants are
solved.
FMV = 29.521 – 31.778DTR – 3339.447ROA +
174.647(DTR × ROA) + 33.66165 (5)
5.2.3 The Third Hypothesis
The third hypothesis had been developed to enable
examining the assumed moderating impact of firm
size, as measured by the natural logarithms of total
assets, on the effect relationship of debt ratio on firm
value, as measured using the Tobin’s Q. The multiple
linear regression model is used in testing this
hypothesis. The statement of the hypothesis is listed
again, in null form, as follows.
Ho3. The size of the listed utility-power and food-
beverage firms at Amman Stock Exchange does not
moderate the relationship between financial leverage
in the capital structure and firm value.
Table (6) shows the results of the multiple linear
regression model. The first model results in R2 of
0.020, which means that that debt ratio only explains
2 percent of the variance in firm market value. The
model shows also that f-value equals 2.654, which
cannot be considered significant. The second model
includes firm size as a moderator variable. With
regard to the second model, R2 increases by 0.336
percent to be equals 0.364, and the computed
coefficient of significance became equals zero, or a
very closed value to zero. Because f-value is greater
than the tabulated, and because the computed
coefficient of significance is less than 0.05, the null
hypothesis is rejected, where instead, its alternative
one is accepted. These results indicate that there is a
significant moderating effect of firm size on the
effect relationship of debt ratio on firm market value,
of the listed utility-energy and food-beverage firms at
ASE.
Table 6. Summary of the direct effects and interaction effects
Independent variable
Variables
First model
Second model
Sig
F
Sig
F
ROA
Direct effects
0.106
2.654
Interaction effects
-
0.000
24.075
R2
0.02
0.364
Adj.R2
0.013
0.349
∆ R2
0.336
∆ F
21.421
Sig.
0.000
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DOI: 10.37394/232015.2022.18.102
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Table 7, shows the coefficients of the third
hypothesis. When the coefficients of the second
model are solved, the model became as follows.
MV = 99.627 + 10.773DTR – 4.891ROA –
20.626(DTR×SZE) + 45.482 (6)
Table 7. The coefficients of the 2nd Hypothesis
FMV = 99.627 + 10.773DTR – 4.891ROA – 20.626(DTR×SZE) + 45.482
Variable
Coefficients
Std. Error
t-Statistic
Sig.
Independent variables
Constant
99.627
45.482
2.190
0.030
DTR
10.773
16.079
0.670
0.504
Size
-4.891
2.845
-1.719
0.088
(SIZE×Log.
Assets)
-20.626
2.822
-7.309
0.000
R2
Adj. R2
F
Sig.
Durbin-Watson
Based on the results of the test, model 2, which is
concerned with the moderating impact of
profitability, became as follows, when constants are
solved.
FMV = 99.627 + 10.773DTR – 4.891SZE -
20.626(DTR×SZE) + 45.482 (7)
6 Findings and Conclusions
The study investigates the impact of financial
leverage in the capital structures of listed utility-
energy and food-beverage firms ASE on firm value.
In additions, the study determines whether firm
profitability and size moderate the impact of financial
leverage in the capital structure of these firms on firm
market value. The simple and multiple linear
regression methods are employed in hypotheses
testing, where the entire hypotheses are tested under
5 percent predetermined level of confidence, which is
equivalent to 5 percent coefficient of significance.
This conclusion is partially in agreement with Dang
and Do (2021), while this finding is in opposite to the
findings of Natsir and Yusbardini [18], Hirdinis’s
[12], and Uzliawati, et al [23].
Based on the data analysis and hypotheses
testing, the results reveal that financial leverage in the
capital structure of the listed utility-energy and food-
beverage firms at ASE, has no direct significant
impact on firm value. With regard to firm
profitability as a moderating variable, the hypotheses
testing reveals that profitability plays a moderating
role in the impact relationship of financial leverage
on firm market value. This result is in agreement with
Almahadin and Oroud [5]. Similar to profitability, the
results show that firm size moderates the impact
relationship of financial leverage on firm market
value. This finding agrees the finding of Santosal’s
study [21], Hirdinis’s [12], Muigai and Muriithi [16].
More analysis of more industries are recommended to
be made regarding the possible moderators that
affecting the impact of financial leverage on firm
market value.
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DOI: 10.37394/232015.2022.18.102
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DOI: 10.37394/232015.2022.18.102
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