Mutah univirsity department of MBA Dr.

mutaha bin-hani

Factors Affecting the Financial Structure of Jordanian Industrial

Companies

Abdullah Hammad Al-matarneh

Department of MBA
Muta University
Dr. muntaha Bani-hani

Abstract
the study aims to shed light on the factors influencing the use of debt ratio in the
Jordanian industrial companies from 2006-2013. The Amman Financial Market
was used to obtain the necessary information about the companies to be used in the
study. The study model included seven variables: liquidity, profitability, Past
indebtedness, size of company, age of company, tax and non-credit tax savings,
regression analysis method has been used.
The study concluded that there is a statistically significant relationship between the
debt ratio and the size of the company and the previous indebtedness. The
counterparty also found a negative correlation between the ratio of debt,
profitability, liquidity of the company, age of the company and tax savings.

Introduction:
The study was prepared according to the literature of financial management, with
reference to the findings of a series of related studies. The concepts of the financial
structure, the objective of the study and the importance of the study were presented
in addition to a brief presentation of the most important factors in the financial
structure. The development of previous studies that are directly related to the subject,
and then formulated hypotheses related to the determinants of financial structure in
the industrial shareholding companies, and these hypotheses were tested through the
statistical analysis shown in the research.
Mutah univirsity department of MBA Dr. mutaha bin-hani

Many theories in the financial field have been considered and still consider the
definition of funding structure to be an important and hot topic in the financial field
and that financial decision making is an important decision that affects competition
between companies. On the other hand, the ability to obtain funds Debt and the cost
of this debt are the focus of determining the optimal financing structure for
companies. Reducing the cost of debt is a goal pursued by the financial management
of these companies in order to achieve the best financial leverage that will eventually
raise the market value of the owners' wealth (Mato, 1990).
The Jordanian industrial sector, which comprises ninety-four companies, is one of
the sectors that rely on debt to finance and expand its investments. It faces fierce
competition among them in terms of management efficiency, product quality,
realized profits, growth rate, sales volume and market capitalization. Therefore, this
study was prepared to shed light on the most important factors affecting the decision
to use debt funds in Jordanian industrial companies and the relative importance of
each of these factors.
Concept of financial structure, defines the financial structure as a set of funds
through which the assets of the enterprise are financed, including borrowed
financing and property finance, which form the left side of the statement of
financial position james & van horn, (2003), The capital structure was defined as
representing the debt ratio of the company in the current period and measured by
dividing the total debt into total assets, Shalash,al-Bouqoum and Wissam al-Aoun
(1997-2001).is the variety of sources from which an entity has acquired funds to
finance its investments, and includes all the elements that comprise the component
of liabilities, both long-term and short-term, Alhindi, (1989), defined how to
finance the total assets of the company's investments and is the left side of the
budget ie the liabilities and shareholders' equity.Almydani, (1999), The capital
structure is defined as including equity (internal financing) and debt (external
financing). The capital structure also refers to how the assets are financed.
Some know the capital structure, Abdul Jalil (2008-2012), Term financing and
long-term financing, Al-Shahat, (2000).
Factors influencing the financial structure of Jordanian industrial companies include:
1 - The size of the company: The size of the company is measured by the size of its
assets (Song, 2005) and (Akhtar, 2005 and Fattouh, 2005) and has an impact on the
proportion of debt use in its funding structure There are many studies that examined
the reasons that lead to There is an impact on the ratio of assets to debt use. For
Mutah univirsity department of MBA Dr. mutaha bin-hani

example, small businesses find that solving their financial problems by borrowing is
costly (Chung, 1993) and Grinblatt (1998).Large companies tend to borrow to solve
their financial problems as an attempt to diversify their sources of finance because
of the low rate of large companies' stumbling as opposed to small businesses (Jean-
Laurent Viviani, 2008). Studies have revealed an inverse relationship between the
size of an entity and the risk of bankruptcy. Large enterprises, usually with a degree
of diversification, are less exposed to this risk and thus have the drive to increase the
proportion of funds borrowed into the capital structure. (Shalash, Al-Baqoum and
Al-'Awn, 1997-2001)
2. Profitability:There are many studies that have confirmed that there is a negative
relationship between the profitability of the company and the debt ratio in its capital
structure, so that high-profit companies tend to finance their systems from low-cost
internal financing sources. If the company needs financing, it resorts to external
borrowing. (Ramadan and al-Aqdah, 2006). Also, those with low profitability and
good investment opportunities will undoubtedly resort to external financing and start
debt before issuing property rights,According to the principle of gradual use of
sources of finance, this leads to high level of debt on the other side, high-profit
enterprises face good investment opportunities, they use their profits in financing
investments, which makes the debt ratio low. (Shalash, Al-Baqoum and Al-'Awn,
1997-2001)
3- Liquidity: Studies have found an inverse relationship between liquidity and debt
ratio in the capital structure so that the increase in the liquidity of the company
enables it to use this liquidity when needed without resorting to external borrowing.
Ramadan and al-Akdah,( 2006). also said that liquidity has a dual effect on the
capital structure where the relationship between liquidity and debt ratio can be
positive or negative, Facilities with high liquidity have the ability to meet short-term
obligations, making it easier for them to borrow, and here we expect a positive
relationship between them. Given the lack of information available to financial
institutions and markets, high liquidity facilities may use liquidity to finance their
investments. In this case, their debt ratio is low, resulting in an inverse relationship
between liquidity and debt. (Shalash, Al-Baqoum and Aoun: 1997-2001)
4. The structure of the company's assets: There is an inverse relation between the
structure of the company's assets and the ratio of indebtedness in its capital structure.
This unexpected relationship is due to the Companies Law, which recently
authorized companies to re-evaluate their fixed assets based on market value, In
Mutah univirsity department of MBA Dr. mutaha bin-hani

addition to the fact that the increase in the ratio of assets often does not mean a
decrease in the risk of the company as the assets of the company with high privacy
is the value of liquidation or liquid value low because of non-utilization in other
companies. (Mayad and Ziad Ramadan, 2006). Mayers & Majluf (1984) points out
that an enterprise that has assets that can be provided as collateral to lenders has the
motivation to rely heavily on borrowed funds,The ratio of fixed assets to total assets
is high, this means that the ratio of fixed costs to total costs is high because of the
size of the cost of depreciation of fixed assets. This means that the company has a
high operational lift rate , And that profits are sensitive to any small change in sales,
and here is borrowing to increase the volatility and instability in the profits available
to shareholders, and this makes financial institutions reluctant to lend such a
company only within limits, so as not to contribute to increase the risk of volatility
of profits Company, and make its results negative.(Shalash, Al-Baqoum and Al-
'Awn, 1997-2001)
5- Growth rate: A positive correlation between the company's expected future
growth rate and debt ratio. The financial structure as companies with a high ratio of
market value to book value tend to borrow more than companies with a low ratio.
(Ramadan and al-Akdah, 2006)
6- Risks: There is a negative relationship between the risk and debt ratio of the
capital structure. The higher the risk, the lower the indebtedness of the capital
structure as the risk increases the costs of financing by borrowing, which drives
companies to tend to finance their projects with internal equity or issuing new shares.
(Ramadan and Al-Aqdah, 2006) The company's credit rating and its ability to borrow
on standard terms depends in its most important aspect on the ratio of debt in the
company's financing structure,Whenever the company needs new financing, the two
themes of the company's financing structure, and the combination of financing is the
most important issue of discussions and negotiations between the company and the
banking sector, or financing institutions. (Shalash, Al-Baqoum and Al-'Awn, 1997-
2001)
7. Tax legislation, exemptions and savings:Most studies have indicated that
companies with high tax exemptions (against consumption and investment in assets)
compared with their income have low debt ratios compared to other similar
companies, and that the company's decision depends on the amount of tax
exemptions. Its projects have tax benefits compared to the establishment of new
shares, because profit on shares is paid after paying taxes. (Shalash, Baqoum and
Mutah univirsity department of MBA Dr. mutaha bin-hani

Al-'Aun, 1997-2001). And the existence of an inverse relationship between the tax
and debt ratio in the capital structure of the company as companies use the tax
advantage to borrow and finance their activities from borrowing funds in order to
reduce the taxes paid as the interest expenses for tax purposes, but this relationship
is not significant statistical or economic. (Ramadan and al-Akdah, 2006)
8. Degree of specialization: The higher the specialization, the higher the cost of
bankruptcy, compared with other similar establishments that follow the
diversification policy, so that single-product-based enterprises are expected to tend
to reduce the ratio of loans to reduce risk in the capital structure. (Shalash, Al-
Baqoum and Al-'Awn, 1997-2001)
9. Age of the company: The importance of the age of the company that it is the main
measure of the reputation of the company as seen by many researchers, gives an idea
of the company's ability to continuity and thus low ability to obtain loans, and as the
newer companies less old compared to older companies usually characterized by
The low profitability, the increased need to finance expansion and growth projects,
the low credit rating, and hence the low borrowing capacity, According to TOT's
theory, there is a positive relationship between the age of the company and the debt
ratio. On the other hand, POT believes that there is an inverse relation between the
age of the company and its debt ratio, where the information gap is large and modern
companies, which leads companies to choose sources of funding less sensitive to the
gap Information is borrowing funds esperanca et al. (2003). (Ramadan and al-
Akdah, 2006)
10 - The theory of the agency: If the work of the major shareholders as observers on
the performance of managers it is expected that the Department can not work to
reduce the debt ratio in the company to achieve their own interests In other words,
companies that have strong control by the shareholders usually have a high debt
ratio. On the other hand, because of the desire of managers to retain their jobs, it is
in their interest to continue the company, which means that they usually want a low
rate of indebtedness in the financing structure to reduce the risk of bankruptcy
(Yaiza, 2005). (Kilani, Kadoumi and Amarna, 2000-2009)

Problem statement:
The financing structure has gained considerable importance after the assumption of
Modigllini & Miller (1958), based on the ideal world assumptions, that there is no
Mutah univirsity department of MBA Dr. mutaha bin-hani

difference between the use of external and internal sources of finance or debt and
property rights. This result is incorrect because we live in a real world. In theory,
there could be optimal financing that minimizes the cost of capital in the company.
In practice, there are several factors that control the financial structure,, The degree
of risk that the company's management wishes to bear when financing debt in
pursuit of greater profitability, the sensitivity of the lenders to the high
indebtedness of the company, the nature of the activity practiced by the company,
growth rates, stability in sales, competition and the size of assets, The
identification of these and other factors will contribute significantly to determining
the debt sustainability of companies. In order for the entity to be eligible for other
funds, certain requirements must be met which are determinants of the financial
structure, which vary from one sector to another and from one company to another.

Research question:
- -How does the Liquidity, Profitability,The age of the company,Previous
indebtedness,Taxes,Company size and Non-credit tax savings, as means of
reducing and increasing through improving Financial Structure?

Objective of the study:

This study aims to achieve the following objectives:
Identify the specific factors of the financial structure of Jordanian public
shareholding companies through:
Determining the relationship between some accounting indicators and the structure
of the financial structure of industrial joint stock companies in Jordan.

The extent of the effects of these factors on the ability of the enterprises in question
to obtain funding.
Determine the absorptive capacity of debt in the facilities under consideration, and
know their ability to borrow money from the financiers.

Definitions:
As for how to measure the variables are as follows:
Mutah univirsity department of MBA Dr. mutaha bin-hani

1. The size of the company will be expressed as the natural logarithm of the total
assets
2. Liquidity: It is measured by dividing the current assets by total assets.
3. Profitability rate: Measured by the profit-tax division, the total assets.
5. Age of the company: It will be expressed in natural logarithm for the number of
years since the company was founded.
6 - Tax: It will be calculated on the method of proportion of taxes paid for
operating profit.
7. Non-credit tax savings: It is measured by dividing the total consumption by total
assets.
8. Previous debt ratio: It will be expressed in total liabilities to total assets.

Study Hypotheses:

The present study focuses on the following hypotheses:

* The first hypothesis: There is no impact of the age of the company on the financial
structure of companies.
* The second hypothesis: There is no impact on the profitability of the company on
the financial structure of companies.
* The third hypothesis: there is no effect of taxes on the financial structure of
companies.
* The fourth hypothesis:: There is no impact on the liquidity of the company on the
financial structure of companies
* The fifth hypothesis:: There is no impact on the size of the company on the
financial structure of companies.
* Sixth hypothesis: There is no effect of non-credit tax savings on the financial
structure of companies.
* Seventh hypothesis: There is no impact of the previous debt ratio on the financial
structure of the company
Theoretical framework:
Capital structure of the determinants in the Jordanian public shareholding companies
and to study the reality of securities Jordanian market - the study aims to identify the
factors that in the capital structure of public shareholding companies of Jordan, to
find out the extent of harmony with the results of studies that have identified many
Mutah univirsity department of MBA Dr. mutaha bin-hani

of the factors in the capital of companies operating in the developed countries - the
structure because of the many studies that have been conducted to test theories
relating to the structure of capital Atmdt information from developed countries,
giving the study important is that they are trying to narrow A gap between theory
and practice in a developing country such as Jordan through the analysis of the
funding decision of the Jordanian public shareholding companies, And highlights
one of the most important topics that concern the researchers, so that the decision to
finance the company is one of the most important decisions that the management of
the company to take them continuously and concurrently with the achievement of
companies to success and expansion - the study found a negative relationship of
statistical and economic significance between the capital structure The relationship
between the capital structure of the Jordanian companies and their size is a direct
relationship. The study did not provide any evidence of a relationship between the
capital structure, the age of the company, the expected growth of the company and
the tax shield of the company.(Ramadan and al-Aqdah, 2006). The structure of
capital and the factors influencing it - Due to the importance of the capital structure,
the study came in order to identify the nature of the company's activity at the level
of financial leverage in public shareholding companies. The study found that there
is an effect on the nature of the activity practiced by the company at the level of
capital structure, And the financial structure. This confirms that companies with
large fixed assets are easy to borrow and that there is a positive relationship between
the size of the company and the raising of funds because large companies have little
risk of bankruptcy and encourage lenders to lend them, And on the other hand, the
negative correlation between profitability and financial raising and the reason for
this relationship that high-profit companies resort to the internal funds generated
from profits as a first option and then resort to borrowed money in an attempt to
increase profits by reducing costs related to borrowing.La Saidi, (2005-2010),

- The importance of this study stems from the fact that it helps to identify the most
important factors that determine the financial structure of the public shareholding
companies, which the state relies heavily on in promoting development and
prosperity. This study is an extension of a group of previous studies in Jordan.
Financial institutions in other countries outside Jordan. The study also showed a
positive relationship between the ratio of previous debts and the current debt
ratio.This positive relationship can be explained by the fact that the borrowing of
many enterprises is a kind of routine practice especially for enterprises that enjoy a
Mutah univirsity department of MBA Dr. mutaha bin-hani

low rate of debt. In light of the availability of liquidity in private and government
financing institutions, there is a negative correlation between liquidity, . This
negative relationship can be explained by the gradualization of the use of available
sources of finance. The more liquidity a firm has, the more money it will rely on
internal sources of finance, leading to a lower level of debt. The negative
relationship may be due to the expected conflict between debt holders and
shareholders, where shareholders can exploit liquid assets at the expense of debt
holders,Have shown a negative correlation between profitability and debt ratio.
This negative correlation can be explained by the fact that it is consistent with the
theory of gradation in the use of sources of finance, which considers that
businesses prefer to use internal sources of finance if they have the opportunity to
hold profits before resorting to external sources, The first is debt; the reason for
this is that internal sources of finance, which may be less expensive than debt and
equity issuance, have shown a negative correlation between growth rate and debt
ratio because of the tendency of firms to invest in relatively high-risk projects. And
because companies are deprived of some investment, because of premiums paid by
the company on its long-term loans,Sulaiman Shlash, Ali Al-Buqoum and Salam
Al-Oun for the period (1997-2001).The importance of the study in achieving the
main objective is to determine the impact of each variable of the study factors that
affect the use of debt in the structure, in addition to the importance of the use of
debt in the structure of funding is that the value of debt used as an information
indicator and mechanism to monitor the conflict between shareholders and
managers - The ratio of the use of debt in Jordanian industrial joint stock
companies is adversely affected by the operating profit margin,Kilani, Kadoumi
and Amarna - (2000-2009)

Research framework:
Place the form in the following mathematical format:
= + 1 + 2 + 3 + 4
+ 5 + 6 + 7
Whereas:

The financial structure of the company: >>> LEV

the liquidity ratio: >>> FL
the profitability ratio:>>> ROA
Mutah univirsity department of MBA Dr. mutaha bin-hani

the size of the company:>>> LNFS

the age of the company: >>> LNFA
the tax:>>> TR
Non-credit tax savings:>>> NDTS
Previous debt ratio:>>> Llev
It can also be summarized as follows:

Independent Dependent

FL
ROA
LNFS
LEV
LNFA
TR
NDTS
Llev

Definitions:
As for how to measure the variables are as follows:
The size of the company will be expressed as the natural logarithm of the total
assets
Liquidity: It is measured by dividing the current assets by total assets.
Profitability rate: Measured by the profit-tax division, the total assets.
Age of the company: It will be expressed in natural logarithm for the number of
years since the company was founded.
Tax: It will be calculated on the method of proportion of taxes paid for operating
profit.
Non-credit tax savings: It is measured by dividing the total consumption by total
Mutah univirsity department of MBA Dr. mutaha bin-hani

assets.
Previous debt ratio: It will be expressed in total liabilities to total assets.
Society and study sample:
The study population consists of the 50 Jordanian industrial companies. The reason
for this is the availability of the necessary financial data for the study for an eight-
year period.

- Study variables:
In order to determine the effect that some internal and external factors that
determine the ratio of debt used in the financing structure can have, the following
factors will be considered as independent variables:
1- Liquid liquidity
2- Profitability
3- Firm size firm size
4- The age of the company firme age
5- Non-Debt Tax Shield
6- Tax
7- The previous debt of the company last Leverage

The dependent variable is the debt ratio expressed as total debt divided by total
assets.