The effect of financial leverage on banks' performance: empirical evidence from a frontier market - the Amman Stock Exchange

Abstract

This paper examines the effect of financial leverage (FL) on a bank's performance by adopting the dynamic generalised method of moments (GMM) estimator over the period 2004-2016. Also, it examines the impact of the recent financial crisis of 2008 on the Jordanian banking industry. The study sample is based on a comprehensive list of listed banks in Amman Stock Exchange (ASE). Findings show that a bank's leverage is a significant determinant of its performance. FL has negative effects on banks' performance. Mainstream and pure Islamic banks were not immune to the crisis. Yet, Islamic banks seem to show positive signs of recovery from the crisis. Converted Islamic banks did not have better immunity to the global shocks than mainstream banks. Large banks had better financial performance than small banks, and new banks are better able to recover from the adverse effects of the crisis than old ones.