The determinants of the capital structure : evidence from Jordanian industrial companies

Abstract EN

This study examined the capital structure of listed industrial companies on Amman Stock Exchange (ASE) over the period (2001-2005).

The findings of this study contribute towards a better understanding of financing behavior in Jordanian industrial companies.

Hypotheses, based on comparing the relationships between Leverage ratio (Lev 1), LTD / TD (Long-term debts / total debts) and five explanatory variables that represent size, tangibility, profitability, long-term debt and short-term debt.

To test those relationships regression analysis for Leverage ratio (Lev 1) and LTD / TD model was used to explain determinants of the capital structure of Jordanian industrial companies on the time period (2001 – 2005) There was a significant positive relationship between leverage ratio (Lev 1) and size (TA), Tangibility (Tang), long-term debt (LTD) and short-term debt (STD) and there was a significant negative relationship between leverage ratio and Profitability of the firm.

In other words, the results of this study showed that a significant positive relationship between LTD /TD and size (TA), Tangibility (Tang), and long-term debt (LTD) and there was a negative relationship between LTD/TD and short-term debt of the firm.

Also, the results showed that Total assets, Tangibility, Long-term debt, had a positive correlation with LTD/TD.

While, short-term debt had a negative correlation with LTD/TD.

As well as, Jordanian industrial companies are depending on equity for financing their investments, where, the equity of Jordanian industrial companies represents about (70%) from their total finance.

Despite the fact that this correlation matrix ignores joint effects of more than one variable on leverage, the Long-term debt, and Short-term debt are positively related to Tangibility and Total assets.

Profitability has a negative correlation with short-term debt and total debt ratios.

This implies that (1) Growing companies and companies with high levels of tangible assets tend to use short-term debt rather than long-term debt.

(2) Large and profitable companies are less likely to use short-term debt and tend to use less debt overall.