The Relationship between Capital Structure and Firm Performance: Evidence from Jordan

Abstract

The purpose of this study is to empirically investigate the relationship between capital structure and firm performance across different industries using a sample of Jordanian manufacturing firms in Jordan. The annual financial statements of 45 manufacturing companies listed on the Amman Stock Exchange were used for this study which covers a period of five (5) years from 2005-2009. Multiple regression analysis was applied on performance indicators such as Return on Asset (ROA) and Profit Margin (PM) as well as Short-term debt to Total assets (STDTA), Long term debt to Total assets (LTDTA) and Total debt to Equity (TDE) as capital structure variables. The results show that there is a negative and insignificant relationship between STDTA and LTDTA, and ROA and PM; while TDE is positively related with ROA and negatively related with PM. STDTA is significant using ROA while LTDTA is significant using PM. The study concludes that statistically, capital structure is not a major determinant of firm performance. It recommends that managers of manufacturing companies should exercise caution while choosing the amount of debt to use in their capital structure as it affects their performance negatively.