The Impact of Liquidity and Leverage on Firm Value of Public Listed Firms in Jordan

Abstract

This study investigates the impact of liquidity and leverage on the firm value of publicly listed service firms in Jordan, providing insights into financial management practices in emerging markets. Using secondary data from 38 service firms listed on the Amman Stock Exchange between 2011 and 2021, the study measures firm value through Tobin's Q, liquidity via the cash ratio (CHR) and quick ratio (QR), and leverage through short-term debt (SD) and long-term debt (LD). Employing Partial Least Squares Structural Equation Modeling (PLS-SEM), the findings reveal that the quick ratio positively influences Tobin's Q, suggesting that higher liquidity, excluding inventory, enhances market valuation, aligning with Pecking Order and Agency Cost Theories. However, the cash ratio negatively affects firm value, indicating inefficiencies from excessive cash reserves. Both short-term and long-term debt positively impact Tobin's Q, supporting the Trade-Off Theory by highlighting the strategic benefits of leverage. While the study is limited to the Jordanian service sector and data from 2011 to 2021, its findings offer valuable empirical evidence on the distinct effects of liquidity and leverage in emerging markets. These insights are relevant for managers, boards, policymakers, and government agencies aiming to enhance economic prosperity and firm performance.