Dynamic Linkages Between Profitability and Its Determinants: Empirical Evidence from Jordanian Commercial Banks

Abstract

This paper employed the panel Unit root tests, co-integration, and panel Autoregressive Distributed Lag (ARDL) model to examine the link between banks' profitability and its determinants for 13 Jordanian commercial banks between 2000 and 2018. Pooled mean group (PMG) and dynamic fixed effect (DFE) models were applied. Hausman test result confirmed that DFE was preferred to PMG. The results confirmed the existence of a long-run equilibrium relationship between commercial banks' profitability and their determinants. In the short-run, banks' profitability in Jordan is positively related to return volatility. However, this is negatively related to credit risk and market concentration. In the long run, profitability is positively related to credit risk and negatively related to operational risk, bank size, stock market volatility, and market concentration. Credit risk and capital have bi-direction causality with banks' profitability, while GDP and market concentration have uni-direction causality. At present, the Jordanian economy during the Covid-19 pandemic triggered the banking sector's impact on the economy as the sector contributed to 20.8% GDP in 2019. The findings can help stakeholders such as bank managers, investors, shareholders, and policymakers make better decisions on banks' performance, thereby contributing to their economies.