THE IMPLICATIONS OF DEBT FINANCING POLICY ON FIRM’S CORPORATE PERFORMANCE
Abstract
Citation Information: Aladwan, M., Alsinglawi, Alhawatmeh & Almaharmeh, M. (2022). The implications of debt financing policy on firm's corporate performance. ABSTRACT The study aims to focus on establishing evidence for the impact of debt financing policy on firm corporate performance. The study employed correlative regression design using panel data for Jordanian non-financial companies covered the period from 2006 to 2019. Return on Assets (ROA) and Return on Equity (ROE) were used as determinants of firm corporate performance while Accounts Payable Debt (APD), Short-Term Loans (STD), Long-Term Loans (LTD) were employed as determinants of debt financing policy; other variables namely; Total Assets (TA), Operating Income (OINC) and operating cash flow (LIQ) were used as control variables. The final results of the study provided conclusive evidence that corporate performance moves positively or negatively depending on the type of debt source, the unanticipated regression correlations revealed mixed results; short term loans was found positively correlated with performance, Whilst long term loans and accounts payable debt were surprisingly negatively correlated to performance.
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This study examines the relationship between capital structure and financial performance. It is motivated by a desire to explain debt use by Omani firms. The results of this study suggest that, contrary to the Trade-off Theory of capital structure, there is a negative association between the level of debt and financial performance. This can be attributed to the high cost of borrowing and the underdeveloped nature of the debt market in Oman. The tax savings that the firm receives by using debt does not seem to be sufficient to outweigh the costs of using debt including the high interest cost.
The relationship between capital structure and profitability cannot be ignored because the improvement in the profitability is necessary for the long-term survivability of the firm. This paper seeks to extend Abor’s (2005) findings regarding the effect of capital structure on profitability by examining the effect of capital structure on profitability of the American service and manufacturing firms. A sample of 272 American firms listed on New York Stock Exchange for a period of 3 years from 2005 – 2007 was selected. The correlations and regression analyses were used to estimate the functions relating to profitability (measured by return on equity) with measures of capital structure. Empirical results show a positive relationship between i) short-term debt to total assets and profitability and ii) total debt to total assets and profitability in the service industry. The findings of this paper show a positive relationship between i) short-term debt to total assets and profitability, ii) long-term debt to total assets and profitability, and iii) total debt to total assets and profitability in the manufacturing industry. This paper offers useful insights for the owners/operators, managers, and lending institutions based on empirical evidence.
The objective of this research is to find the influence of Short Term Debt and Long Term Debt on Return On Equity in mining industry listed in Indonesia Stock Exchange. This research used qualitative and quantitative methods, meanwhile this analysis of data processing used regression analysis by SPSS program. Mining industry Companies listed in Indonesia Stock Exchange in
2003-2007 had chosen as the population of this research. Data analysis applied measuring method by regression analysis model then be estimated by ordinary least square. The analysis result as individual shows Short Term Debt variable have a positive influence and significant on Return On Equity, Long Term Debt variable have a negative influence and significant on Return
On Equity. The analysis result as simultaneous shows there is influence of Short Term Debt and Long Term Debt to Return On Equity. Long Term Debt variable is a dominant variable influences to Return On Equity
Corporate governance theory predicts that leverage affects agency costs and thereby influences firm performance. We propose a new approach to test this theory using profit efficiency, or how close a firm's profits are to the benchmark of a best-practice firm facing the same exogenous conditions. We are also the first to employ a simultaneous-equations model that accounts for reverse causality from performance to capital structure. We also control for measures of ownership structure in the tests. We find that data on the U.S. banking industry are consistent with the theory, and the results are statistically significant, economically significant, and robust.
This article investigates financing practices across firms in the forest products industry by studying the relationship between debt and taxes hypothesized in finance theory. In testing the theoretical relationship between taxes and capital structure for 20 publicly traded forest industry firms for the years 1994-2003, we find a negative relationship between profitability and debt, a positive relationship between nondebt tax shields and debt, and a negative relationship between firm size and debt. All three results run counter to theoretical expectations. Results indicate that, controlling for size, firms in the forest products industry with higher market valuations and pretax earnings used more conservative financing strategies. Also, the article develops a dynamic panel model with fixed effects for each firm and residualization to address issues of multicollinearity.
This paper examines the impact of capital structure on firm's financial performance using sample of thirty non- financial firms listed on the Nigerian Stock Exchange during the seven- year period, 2001- 2007. Panel data for the selected firms are generated and analyzed using Ordinary Least Squares (OLS) as a method of estimation. The result shows that a firm's capital structure surrogated by Debt Ratio, DR has a significantly negative impact on the firm's financial measures (Return on Asset, ROA and Return on Equity, ROE). The study by these findings, indicate consistency with prior empirical studies and provide evidence in support of Agency cost theory.