The European Journal of Comparative Economics

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EJCE Year: 2019, December. Volume: 16 - Issue: 2

Financial leverage and firm performance: evidence from Amman stock exchange

by Bassam M. Abu-Abbas, Turki Alhmoud, Fatima A. Algazo

Start page: 207 - End page: 237

Keywords: Financial leverage, Firm performance, Business strategy, Competitiveness

Jel code: D21; G32; L19; M41; N25

DOI: 10.25428/1824-2979/201902-207-237

Abstract:

This study tests the relationship between financial leverage and firm performance. Previous studies found mixed results (e.g., Gill et al. 2011, Mouna et al. 2017, and Abubaker (2015). Some suggest including the effect of the firms’ business strategy and the degree of competitiveness on the relationship between the financial leverage and the firms’ performance. Data is subjected to pooled General Least Square to test the hypotheses of the study. Based on a sample from Amman Stock Exchange, the study finds that the financial leverage has a negative relationship with the firm performance proxies by ROA and EVA. In addition, the relationship between financial leverage and performance is more negative for the firms that use product differentiation strategy compared with the firms that use low-cost strategy and for the firms with a high degree of competitiveness compared with the firms with a low degree of competitiveness. Different tests including the Wald F-test on the linear restrictions support confirm the above conclusions. Different diagnostic tests show that the results are reliable, free from autocorrelation, robust, and not affected by multicollinearity.

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