Capital Structure and Corporate Performance: Evidence from Jordan

Abstract

The central objective of this study is to investigate and examine the effect which capital structure has had on corporate performance using a panel data sample representing of 167 Jordanian companies during 1989-2003. This paper also examines the effect which external shocks have had on Jordanian corporate performance and industrial sectors. Our results showed that a firm’s capital structure had a significantly negative impact on the firm’s performance measures, in both the accounting and market’s measures. This result suggests that agency issues may lead to higher debt in the capital structure than there should be. We also found that the short-term debt to total assets (STDTA) level has a significantly positive effect on the market performance measure (Tobin’s Q), which could support Myers' (1977) argument that firms with a high STDTA have a high growth rate and high performance. The Gulf Crisis 1990-1991 was found to have a positive impact on Jordanian corporate performance as the Jordanian market was the only market that was open to Iraq. On the other hand, the outbreak of Intifadah in the West Bank and Gaza in September 2000 had a negative impact on corporate performance, as most of the Jordanian companies exported to the West Bank.

Keywords: corporate performance and failure, capital structure, Jordan

JEL Classification: G32, G33