The effect of financial policy and capital assets on firm performance: Evidence from service companies listed on the Amman Stock Exchange

Mohammed Zakaria Soda,Mohammed Hassan Makhlouf,Yazan Oroud

doi:10.5267/j.ac.2021.1.016

Abstract

This study aimed to demonstrate the impact of the financial policy, represented in debt policy and dividend policy, and the capital assets on the financial performance measured by return on equity, total assets turnover and market value added of 53 service companies listed on the Amman stock exchange during the period 2014–2018, using the panel data models. According to the results of testing performed on return on equities (ROE) model, total assets turnover (TAT) model, and market value added (MVA) model, it can be concluded that debt policy has a negative significant effect on market value added and total assets turnover, on the other hand, it has a negative insignificant effect on return on equity. The financial performance of the Jordanian service companies is influenced negatively by the debt ratio as a measure of financial policy; which means service companies are using heavy debt to finance the operating activities, which increases financial cost and the risk of financial failure. The study recommended that service companies can increase the volume of investment in fixed assets to generate high financial performance indicators.

Highlights

IntroductionMost service companies are characterised by a high volume of investments in fixed assets
This study aimed to demonstrate the impact of the financial policy, represented in debt policy and dividend policy, and the capital assets on the financial performance measured by return on equity, total assets turnover and market value added of 53 service companies listed on the Amman stock exchange during the period 2014–2018, using the panel data models
The first one is presented in equation one to examine the impact of financial policy and capital assets on the financial performance measured by return on equity, the second model is examine the impact of financial policy and capital assets on the financial performance measured by total assets turnover presented in equation two; and the final model is presented in equation three to examine the impact of financial policy and capital assets on the financial performance measured by market value added: ROEit= α + β1 DRit + β2 Dit +β3 CAit + εi

Summary

Introduction

Most service companies are characterised by a high volume of investments in fixed assets. The financial policy within any company contributes to increasing the market value and the share of owners through financing and investment decisions, as well as dividend distribution decisions (al-Najjar, 2017). The debt policy is one of the most important financial policies followed by a company in order to secure its financial resources through the trade-off between returns and risks. The increased risk resulting from the use of large debt negatively affects the value of the company's shares while increasing the expected returns due to the resulting leverage. It is necessary to strike a balance between returns and risks to achieve the optimal financing structure and reach the highest value per share in the market (Abu Shmala et al, 2017). The higher the debt ratio, the higher the share price, but at a certain point, the increase in debt will reduce the value of the company because the interest earned from using debtis smaller than the costs incurred in obtaining the debt

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