Determinants of debt-to-equity and its impact on the performance of industrial companies listed on Amman Stock Exchange

Abstract

This paper focuses on investigating the determinants of the debt-to-equity ratio, and its impact on the performance of 20 industrial companies listed on the Amman Stock Exchange (ASE). It uses a numerical research model comprised of two operations: data envelopment analysis (DEA) followed by regression analysis, that is to identify the key determinants of the said ratio and examine the effects of it and its determinants on companies’ performances. Furthermore, the paper detects that firm risk has a substantially positive impact on debt-to-equity and firm size; whereas tangibility and liquidity have a substantially negative impact on debt-to-equity. Finally, the study finds that debt-to-equity and firm size both have a substantially negative impact on performance; contrastingly, liquidity and tangibility and possess a substantially positive impact on the industrial companies’ performances. The importance of exploring the research problem lies in its potential to further benefit and help the industry leaders in the ASE, and stakeholders of these industries, in developing an action plan that determines the debt-to-equity ratio for financing they will need in order to optimize the company’s sustainability and profit generation (Drobetz & Fix, 2005).