Journal of Economic & Administrative Sciences

Vol. 22, No. 1, June 2006 (41 -59)

An Empirical Study of Firm Structure and Profitability Relationship: The Case of Jordan Dr. Abdussalam Mahmoud Abu-Tapanjeh Mutah University
Abstract The present study examines the relationship of firm structure and profitability, taking into consideration major characteristics such as firm size, firm age, debt ratio and ownership structure of 48 Jordanian industrial companies for a period of one decade, that is from 1995 to 2004, listed in Amman Stock Exchange. Hypotheses are developed taking into account both previous research and the particular idiosyncrasies of the national context. The study employed two model specifications in order to test the hypotheses, using the profitability measurement of Rate of Return on Equity (ROE) and Rate of Return on Investment (ROI). The empirical findings suggest that firm structure emerges as an important factor affecting profitability. The results indicate that a weak relationship existed between some of the independent variable and profitability, except for debt ratio. Introduction Firm structure plays a determinant role in firm profitability. A considerable research was undertaken examining the relationship between firm structure and profitability. This relationship is viewed from two competing hypotheses. On the one hand, the traditional market structureconduct-performance or collusion hypothesis and on the other hand, the efficient market hypothesis. The traditional hypothesis postulates that firm structure determines profitability, i.e., high–profit firms are found in highprofit industries with favorable competitive structure. Whereas, the efficient market hypothesis advances the notion that more subtle firm qualities related to organizational and managerial capabilities are those that underline the firm’s competitive advantage, which leads to profitability. (Demsetz, 1973) and (Peltzman, 1977) postulated that market concentration is a result of firms’ superior efficiency that leads to larger market share and profitability. In other words, market-concentration lowers the cost of collusion between firms and this results in higher than normal profits. Many studies are found testing these competing hypotheses and the results concludes with general mixed opinions. (Bain, 1956) and (Mason, 1993) suggest that firm structure involving mainly industry concentration and entry barriers are important determinants of firm profitability. Whereas,

Journal of Economic & Administrative Sciences

June 2006

studies like (Porter, 1991) view that market environment partly exogenous and partly subject to influences by firm actions. Despite the influence, either negative or positive, on the firms’ profitability, specific strategic responses might strengthen in prevailing serious impediments to firm success. Other firm specific factors such as capital intensity, firm size, debt ratio, firm age and market share also affect profitability. Most prior studies were built on western data. Very rare research was done in Jordan as well as in the Arab countries. Thus, this study will add to our understanding of the extent to which the result in Arab countries will be similar to past studies. The remainder of this paper is organized as follows. The next section gives the relevant theoretical background on firm concentration and profitability as well as the development of the hypotheses. The third section describes the methodology and the sample selection. Section four portrays the analysis of the data and the statistical results. The last and final section presents summary, conclusions and directions for future research. Theoretical Background and the Development of Hypotheses This study attempts to investigate the relationship between firm structure and profitability at Jordan Industrial Companies (JIC), taking into consideration the major firm characteristics such as, firm size, firm age, debt ratio, and ownership structure. This prevailing view can be traced from the two basic paradigm notions, i.e., collusion hypothesis and the efficient market hypothesis. The traditional notion or the collusion hypothesis follows the structure-conduct-performance paradigm. According to this hypothesis, firm profitability depends to monopolistic conduct, and this conduct depends on industry structure. This conduct enables firms to set prices above the costs, thus, making abnormal profit. The pioneering work of (Bain, 1951), and (Barney, 1991) lays two assumptions of this paradigm notion. First, the firm is considered homogeneous in terms of strategically relevant resources, and secondly, an attempt to develop resource heterogeneity has no long-term viability due to high mobility of strategic resources among firms. On the other hand, efficient market hypothesis argued the traditional theory (efficient market theory) postulating that firms’ profitability depends on a proxy relationship between superior efficiency, market share, and concentration. (Porter, 1991) has noted that firm profitability can be decomposed into effects steaming from industry structural characteristics and the firms’ strategic positioning within its industry. Extending the argument, this study is a logical approach to add to this literature, in studying the impact of firm structure to profitability by

. 2001) and (Gibson.. This view is also supported by (Chittenden et. size and book equity to market equity must proxy for sensitivity to common risk factors in returns. 2004) found that there is little correlation between firm size and profitability. debt ratio. If stocks are priced rationally. and in addition. (Lopez Garacia & Aybar–Arias. firm age..Dr. 2002). who provided evidence suggesting that size is positively related to long term debt and negatively related to short-term debt. systematic differences in average returns are due to differences in risk. Davidson & Smith. 2003). (Fama & French. Most of the results come out with varying opinions. 1993) captured much of the cross-section of average stock returns. with rational pricing. This suggests that the relationship between firm size and profitability can become negative beyond the threshold firm size. Again. 2000) and (Cassar & Holmes. while (Hecht. (Berk. 1997) suggests that investor returns are positively correlated with size when size is measured with non-market measures such as employees. additional expansion of firm size may further separate ownership from control. if the size reached a threshold. (Romano et. al. Thus. 2001. 2001) conveyed that there is no correlation between non-market measures of size and investor returns. 1999) indicated that larger firms use higher gearing ratios than smaller firms. Critical resource theories stress a firm industry control over the resources such as assets. assets and sales. Again from the company’s perspective. we can mention (Baumol. (Jordan et. they can invest in lines requiring such scale that small firms are excluded. technology and intellectual property as determinants of firm 42 . (Fama & French. al. The following is a separate discussion for each factor leading to the development of the hypotheses: Firm Size and Profitability A good number of researchers had investigated the relationship between firm size and profitability.. 1993) also attributed this predictive power of size to its ability to capture risk. al. also found an important relationship between size and capital structure. 1996). (Leledakis. small firms apparently faced higher capital costs than larger firms. Some studies postulate negative results while some studies have evidence supporting the positive notion.. Abdulsalam Abu-Tabanjeh June 2006 examining the major factors such as firm size. 1959) proposition that large firms have all of the options of small firms. Here. 1985) conveyed that the relationship between firm size and profitability may be positive for some firm size ranges and negative for others. (Hall et. 2000) suggest that size significantly influences the self-financing of smaller companies. al. and they suggest this is a result of smaller firms facing higher financial barriers. and ownership structure. 1998) also found that there is no relationship between financial structure and enterprise size. (Amato & Wilder. (Michaelas et al. Contrary to these studies.

when the size of the firm increases (Kumar. from this theoretical background. Conflicts between shareholders and managers may 43 . and some says no relation exists between profitability and firm size. so that the advantages of others do not prove fatal”. Some studies conclude with negative relation. 1984). So. In this study. Further. Rajan and Zingales. Thus. 2000) postulated a model that proper control over the intangible factors makes the firm profitable. and value added. 2001). 2001) actually did find a negative relation between firm size and profitability for U. but rather on being sufficiently different. Competency theories appeal that small firm can be just as profitable as a large firm in a different competencies that leads to surplus returns. The firm size can be measured in a number of ways. Technological theories of the firm used assets or sales as a measure of firm size. 2003) described that “survival depends not on being better. firm size and profitability sometimes lead to lower profits with the increase of size. It is also less prone to having measurement errors compared with other commonly used measures of firm size like net assets. (Dhawan. Hypothesis 1: Firm Size Positively Affects Profitability. they concluded that the greater the importance of intangible factors like fixed assets. firms during “1970 to 1989” but at a highly aggregated level of services and manufacturing. However. numbers of employees. Further. from these existing theories and past research. sales. (Niman. The researcher choose sales turnover because of its feasibility. Ownership Structure and Profitability Ownership structure defines the institutional basis for power relationships between individuals within the organization and dealings with other organizations (Bowels. debt holders and management.Journal of Economic & Administrative Sciences June 2006 size. the researcher advances the following hypothesis. (Rajan & Zingales. The owners being the equity shareholders of the company and the providers of risk capital would be concerned about the ways of financing a company’s operations. There may also be a conflict of interest among shareholders. Thus. the above review also shows that profitability initially declines and then levels off or increases. small firms also need not necessarily be less profitable than “large” firms within a given institutional environment. firm size is measured by the log of sales.S. Thus. it can be concluded that effect of firm size and profitability comes out with mixed results. Legal institutions and laws improve the protection afforded the owner of the company over these critical resources. the lesser the firm is to grow. Company’s capital structure decision should be properly analyzed and balanced to maximize the firm profitability. the commonly used measures are assets.

However. Jordan as a developing country had one of the largest stock markets in the region. 1998). However. For the purpose of this study. in his study concluded that there is an increased probability of the firm with high gearing levels.Dr. 1979) and (Schweiger & Leana. In 2004. the underlying motivation is the possibility for owners to obtain benefits on the investment made in the business.e. Based on ownership structure. Foreign investors account for 40% of share ownership. financial regulators. Abdulsalam Abu-Tabanjeh June 2006 arise on two counts. firms can be classified as co-operative companies and capitalist companies. whereas. In the co-operative company. 1986) postulated the existence of a positive relationship of participation and the level of satisfaction and commitment on the part of the members. 1994) claim that ownership rights system included in organizational structure plays an important role given that it generates collective behavior and drives individuals to control and promote their own interests. Investors enjoy the benefits of no withholding taxes. It capitalizes more than US $ 7 Billion in 2003. Firstly.. Secondly. Further. 2004) Jordanian corporate and individual investors hold 54% of the shares where the rest is held by the government. 44 . managers may not act in the best interest of shareholders to protect their jobs. (Arnold. and organ of government). Managers may not undertake risk and go for profitable investments. (Morck. In the capitalist company. through participating in the social objectives of the co-operative company where expectations are fulfilled and the need is satisfied. the researcher measured the ownership structure by Government Ownership. ASE listed firms that have no ownership limitation of any kind. with no concern for its future or for the wealth of its shareholders. Amman Stock Exchange (ASE). in the capitalist company the roles of supplier. no taxes on dividends. (Freeman & Lomi. courts.000 investors (Jordanian Shareholding Company's Guide. family ownership and pyramidal control are more desirable than dispersed ownership because the managers can simply loot the firm. managers may transfer shareholders wealth to their advantage by increasing their compensation and perquisites. 2004) conceded that in countries with weak institutions (education system. i. in a co-operative company. and free repatriation of funds. the organizational power is related to the individual. the main incentive is the satisfaction of a common socio-economic necessity. the exchange listed 199 companies and has more than 500. (Locke & Schweiger. Recent studies also postulated the fact that the agency problem is expropriation of minority shareholders by the controlling owners rather than the conflict of interest between managers and dispersed shareholders. entrepreneur and client are normally played by different individuals.

which are still below the potentially maximum benefit. a lot of firms can opt to maintain flexibility reserves. (Modigliani & Miller. the value of the tax levy on revenues would be reduced in the same proportion of the aliquot of 45 . which has liquidity problem. He also pointed out that large companies. Thus. a firm should employ debt according to its capacity without servicing any problem. which does not mean that they have a high debt level. from the above reviews and discussion. it will increase shareholders wealth. a low debt ratio can prove to be burdensome for a firm. Non-government firms includes private companies ownership and individual ownership. He pointed out that taxes benefit of US $ 0. Furthermore. 1963) affirmed that fiscal legislation allows the firm to deduce of the operational profit the amount expended in the payment of interests.2 for each unit of profit before taxes or the equivalent to 10% of the firm’s value. 2000) estimated the magnitude of debt benefit. A bad debt ratio is not necessarily bad. In contrast to the above ideas. Hypothesis 2: Firm Ownership Structure Positively Affects Profitability. the negative information relating debt and profitability observe the tax benefit of the debt. If a firm can service high debt without any risk. which adds to the shareholders wealth. In all. the study of (Graham. On the other hand. The increased borrowing allows a higher interest tax shield. the leverage degree generates agency problems among shareholders and creditors that predict negative relationships between leverage and profitability. Many studies had been found favoring the above idea. whereas Arab investors and Foreign investors comes under Others Ownership. Debt has its merits and demerits. Debt Ratio and Profitability A firm can avoid the risk of financial distress if it can maintain its ability to meet contractual obligation of interest and principal payments. using debt with below their potential devising a possible future need. Cash flow analysis indicates how much debt a firm can service without any difficulty. Besides these factors. usually find relatively lower financial costs. The stability of cash flows reduces the risk of insolvency and enhances the capacity of the new entity to service a larger amount of debt. The study done by (Fama & French. Thus. Here. the researcher proposes the following hypothesis. and Others Ownership. It saves taxes since interest is a deductible expense and at the same time it can cause financial distress also. Besides. 1998) concluded that the debt does not concede taxes benefits.Journal of Economic & Administrative Sciences June 2006 Non-government Ownership. which have means to offer good collaterals. Government Ownership includes government owned firms and government agencies firm. he concludes that big and profitable companies present a low debt rate.

1984) conveyed that profitable firms are less likely to borrow because of their preference for and the rewards of retaining earnings. Thus. 1996) postulated that younger firms rely more on shortterm finance than more mature firms. the researcher postulates the following hypothesis. 1999) postulated that younger firms have higher average gearing ratios than older firms because the latter being more profitable and having accumulated internal sources. 46 . (Myers. the researcher concludes that most of the studies support the general notion that lower debt level decreases the risk of solvency with increases of profitability to a firm. (Chittenden et. 1998) argued and gave no support for the negative impact of debt on profitability. in normal conditions of operation. (Gedajlovic et. the firm with larger financial leverage tends to present.. al. al. the researcher postulates the following hypothesis. 1996). Lincoln et. In order to test this general notion. 2000) also favor this idea. al. (Michaelas et. 1999) and (Cassar & Holmes. according to this literature and in order to verify the same results for the Jordanian industrial companies. Hypothesis 4: Firm Age Positively Affects Profitability. Abdulsalam Abu-Tabanjeh June 2006 the income tax.. higher indexes of profitability on equity. Hypothesis 3: Debt Ratio Positively Affects Profitability. al. (Brealey and Myers. (Michaelas et. 2003. The work of (Chittenden et. (Hall et. and as the profit will be proportional to a smaller equity. 2003) also supported the idea of Myer. In this study. al. (Jordan et. the profit per share tends to be larger. It is considered that the older the firm. 2001) found that business age is not a significant predictor of debt as a source of financing. al. al. The firm will benefit more developed activity because of its more experience business. al. From the above reviews. as a result of a positive relationship between age and profitability.. 2000) suggest that profitability is not statistically significantly related to long-term debt. (Romano et. al. 1992) claim that if the cost of the debt is lesser than the cost of equity. 1996) also suggest that firms with higher level of debt earn less profitability. Therefore. (Hall et.. Age and Profitability The hypothesis of age influence on organizational structure is put forward in organizational theory. A number of studies had been found accepting and favoring this view. the profit would be smaller with comparison with a company without debts. They indicate that profitability is negatively related to total gearing. the organization will be more stable in nature. al.Dr. The study furthermore suggests that the use of both short-term and long-term debt falls with age. debt ratio is defined as total debt by total assets.

y + l f. or Rate of Return on Investment (ROI). share premium. the beginning of the year under study. The sources of data consist of the annual balance sheets. Thus. The Return on Investment (ROI) is calculated as Net Profit after Tax by Net Assets. Rate of Return on Capital (ROC). y +β othow f. The present study is confined to the period of one decade. The researcher used ROI and ROE. as well as regression analysis to estimate the causal relationship. For a homogeneous selection and accurate results of the analysis. The current study use correlation analysis to identify the association between profitability and the independent variables. The main reason behind selecting this period is data availability. the researcher excluded companies under liquidation and those established after 1995. income statements and audit reports of the selected industrial companies.e. from 1995 to 2004. Other relevant data which were not available in the above sources were taken from the Jordanian Shareholding Company's Guide.Journal of Economic & Administrative Sciences June 2006 Research Methodology The researcher employed the industrial companies listed on the Amman stock Exchange. The Return on Equity (ROE) is calculated as Net Profit after Tax by Total Shareholders Equity. The profitability measures mostly used in empirical studies are Rate of Return on Equity (ROE). Many researchers use different measures of firm profitability in the analysis of the relationship between firm structure and profitability.e. It shows potential investors into the business what they might hope to receive as a return. The aim of this study is to examine the relationship between firm structure and profitability. i.. i. y 5 6 ( ( ) ) ( ( ) ) ( ( ) ) 47 . distributable and nondistributable reserves. Most scholars primarily focus on these two factors to measure financial performance and operating performance. y +β logage f. This ratio shows the profit attributable to the amount invested by the owners of the business. y +β govow f.. y +β debt f. The Models The researcher considered the following regression models: Model 1: ROI as the Dependent variable ROI = α0 f. y +β logsize f. The stockholder’s equity includes share capital. the final number of the sample employed for the study included 48 industrial companies. The rate of return on investment indicates the degree of efficiency with which management has used the assets of the enterprise during an accounting period. y +β 4 1 2 3 non − govow f.

y : constant term for firm ( f ) in year ( y ). y +β govow f. logsize f.y : logarithms of the firm’s age for firm ( f ) in year ( y ). othow f. while Table 2 shows the correlation coefficients. with profit after tax by net assets for firm ( f ) in year ( y ).Dr. debt f. Results and Interpretation Table 1 shows some descriptive statistics for the dependent and independent variables. y +β 4 1 2 3 non − govow f. β : regression coefficients. y +β othow f. non. logage f.y : disturbance term for firm ( f ) in year ( y ).y : logarithms of the firm size (total sales) for firm ( f ) in year ( y ). y +β logsize f. Abdulsalam Abu-Tabanjeh June 2006 Model 2: ROE as the Dependent variable ROE = α0 f. y +β logage f. with profit after tax by total shareholder’s equity for firm ( f ) in year ( y ). α 0 f. y 5 6 ( ( ) ) ( ( ) ) ( ( ) ) where ROI : measures the parental corporations’ financial profitability. y +l f.y : other ownership (represent Arab investors and foreign investor ) for firm ( f ) in year ( y ). govow f.govow f. l f. y +β debt f.y : non-government ownership (represent private companies ownership and individual ownership) for firm ( f ) in year ( y ). 48 . ROE : measures the parental corporations’ financial profitability.y : debt ratio (total debt by total assets) for firm ( f ) in year ( y ).y : Government ownership (represent government owned firms and government agency firms ) for firm ( f ) in year ( y ).

744 0.310 0.082 0.186 0.077 0.096 0.283 0.074 0.099 0.097 0.456** -0.108 0.000 Journal of Economic & Administrative Sciences -0.092 0.317** Nongovow -0.195 0.065 0.148 0.094 0.057 Othow Mean STD Mean STD Mean STD Mean STD Mean STD Mean STD Mean Table (1): Descriptive Statistics (n = 48) Govow 2003 2002 2001 1.080 0.272 0.837 0.190 0.272 1.067 0.147 6.067 0.197 0.061 -0.085 0.112 0.365 0.412 1.070 0.190 0.084 0.068 0.186 0.228 0. 0.821 0.05 level (2-tailed).384 Debt 1.050 0.346** 0.360 0.186 0.302** .088 0.192 1.000 0.180 0.377 0.232 0.843 NonGovow 0.221 1.205 0.062 0.069 1.733 0.731 6.054 0.084 0.072 0.325** Table (2): Pearson Correlation Coefficient Matrix (n = 48) 0.000 Debt 1.311 1.085 STD 0.066 0.355 0.186 0.163 0.785 0.369 1.088 0.077 0.093 0.256 0.360 0.069 0.682 0.000 1.093 0.676 0.092* -0.154 0.064 0.000 ROI 1.308 6.381 0.131 0.364** -0.361 0.701 6.060 0.077 0.085 0.887 6.254 0.192 0.189 0.086 1.838 0.056 0.023 0.700 0.309 0.098 0.106 0.377 6.055 -0.060 STD Mean 1995 STD Mean Variable 0.186 0.821 0.832 0.827 0.056 1999 1998 STD Mean 0.173 0.735 6.000 0.120** Logage Logsize 0.146 0.080 0.203 ROE 0.377 0.018 -0.173 0.099 Govow 1.01 level (2-tailed).110 0.191 0.584** ROE 1997 1996 1.067 0.189 0.257 0.145 0.066 0.232 0.075 1.144 0.834 0.193 0.069 0.093 0.191 0.187 0.833 0.212 0.868 0.053 0.112 0.187 0.100 0.095 0.254 0.248 0.082 0.067 0.187 1.065 0.703 0.094 0.048 0.222 1.187 0.147 0.074 0.756 6.225 0.091 0.757 6.074 -0.212 0.000 Non-govow Logsize Logage Govow ROE Debt ROI 49 2000 Othow * significant at the 0.024 0.712 0.724 6.387 0.189 0.163 0.757 0.356 6.069 0.284 Logsize -0.184 0.152 0.840 0.865 0.800 0.055 0.412** -0.165 1.082 0.370 0.098 0.075 0.084 0.040 2004 0.761 0.180 0.097 Logage 0.000 -0.185 0.701 0.758 6.211 0.352 0.290 1. ** significant at the 0.097* Othow -0.137 ROI 0.712 0.184 0.June 2006 STD All Samples Mean 0.288** -0.040 0.

and (Hadlock and James. 1982). It is also apparent from Table 3 that firm age has no significant effects on profitability measured by ROE. there was a significant positive relation during the years 1999-2003 as well as for the pooled sample. debt ratio has a positive significant correlation and government ownership have a negative significant correlation with ROE. However. As far as debt ratio’s relation with profitability of the selected Jordanian industrial companies is concerned. government ownership. and other ownership structure have a negative insignificant correlation with ROI. 50 . (Peltzman. Table 3 shows that firm size has no significant effects on profitability measured by ROE. We mention here the study of (Szymanski et. and (Porter. evidenced by the significant negative coefficient of logsize. al. In the same vein. This result conforms to the conclusions of (Modigliani and Miller. showing a consistent basis during the years of the study. The reduction in costs could come directly from more productive capital equipment. debt ratio. 1963). and non-government ownership have positive insignificant correlation. showing a consistent basis during the years of the study. This indicates a high positive influence on profitability. This effect is multiplied when the firm size is large. However. is significantly negative at the 0. hence affect profitability. the current study does not support Hypothesis 1. the selected industrial companies of Jordan might have depended upon the external funds to operate the necessary working capital finance rather than to finance from internal operation. 2002) who interpret the loan as a positive step. For more concrete results. whereas firm size. the more negative impact on profitability. measured by ROE. 1993) who found a negative association between firm size and profitability. in the overall pooled sample. as the effect of size on profitability. firm size showed significant negative relation with profitability (ROE). Abdulsalam Abu-Tabanjeh June 2006 Table 2 shows that firm age. 1980) argued that rapid expansion of firm size ensures incumbent strong financial performance even in the presence of market share gains from new entrants. The values of R square and F test are also given. (White. 1977). the current study does not support Hypothesis 4. while increased demand could stimulate expansion on the part of the firm. Thus. Table 3 shows the results of estimating the regression equation of ROE for the pooled sample with the overall period of the years under study as well as for each year separately. This could be due to the changes in output either because of increased demand or reduction of costs. Thus. imagining that the company preferred that type of financing because it anticipates high returns. This indicates that the more shares the government owned for the companies. Thus.Dr.05 level. confirming Hypothesis 3.

271 0.689 -0.641 0.343 1.647 -0.570 0.784 -0.323 -1.017 -0.317 0.828 -2.937 0.196 0.555 -0.152 3.251 1.597 -0.534 -0.022 0.098 -2.053 -0. It also highlights that for all the ownership structures.448 0.174 0.504 1.557 0.294 0.105 0.161 -0.571 Furthermore.060 -1.095 -0.Table (3): Regression Analysis for Firm Structure and Profitability (Model 1 – ROE. However.826 -2.196 -1.208 3.980 1.778 0.663 0.056 -2.024 0.252 -1.108 -0.287 -2.226 0.373 1.844 -0.979 1.449 -1.657 4.074 1.015 -0.574 2.658 1.031 -0.016 0.027 0.041 3.039 -1.240 -1.163 -0.273 1.071 -0.021 0.150 β β β 0.411 0.843 0.085 1.356 0.085 -0.065 0.093 -0.321 0.229 4.091 -0. Table 3 shows that the ownership structures.158 8.011 4.167 0.864 -0.148 0.091 1.620 0.6620 0.993 0. measured by government ownership. 1997.834 2.270 0.657 0.739 -0.288 4.589 -0.051 0.518 -0.018 -0.041 -1.533 0.134 -0.240 0.411 3.426 -0.428 8.727 0.703 0.599 -0.072 -0. as the dependent variable) (n=48) t-statistics -1.267 0.687 -0.050 -0.078 14.756 -2.828 1.348 -2.417 4.314 -0.669 0. This might be a consequence of economic crisis and unstable period of time.501 -0.630 0.346 2.437 4.484 6.101 β Constant Logage Logsize Debt Govow Non-govow Othow F value R Square 51 .663 -0.622 -0.313 2004 t-statistics 2003 t-statistics 2002 t-statistics 2001 t-statistics 2000 β All Samples -0.729 1.481 1.597 0.333 0.480 1.865 -1.406 0.146 0. non-government ownership and other ownership.100 1.116 -0.176 0.546 0.243 0. there was a negative impact in 1996.547 0.634 0.248 1.765 0.035 0.169 -2. 2000 and 2001.187 0.026 -1.884 0. in June 2006 t-statistics β β β β β Journal of Economic & Administrative Sciences t-statistics 1999 t-statistics 1998 t-statistics 1997 t-statistics 1996 t-statistics 1995 Variable Name 5.301 0.020 0.179 0.099 1.667 0.061 -0.479 -0.054 .473 0.139 0.547 -0.158 1.070 0.122 -3. have low non-significant impact on profitability in separate years as well as in the pooled sample.757 0.173 0.485 0.292 0.717 -0.972 0.147 0.407 0.513 0.500 4.134 -1.031 0.075 0.418 0.132 -3.785 0.484 0.204 β -0.

firm age. The table shows mixed results with a significant negative impact in 1997 and a significant positive impact in 2001 and 2003. and to see how far this supports the results of Table 3. Table 4 shows firm age and firm size with no significant effect on profitability measured by ROI. the overall pooled sample shows a positive effect for firm age and a negative effect for firm size on profitability (ROI). Furthermore.Dr. non-government ownership shows a slight impact on profitability as was also found in Table 3. the researcher extended the regression analysis using Model 2. However. In this specific case of Jordan economy. Abdulsalam Abu-Tabanjeh June 2006 general. while debt ratio has a high positive impact. while 2003 shows positive significant results. 52 . debt ratio and ownership structure. measured by ROI. viewing the overall pooled sample. a very low insignificant positive impact is found for ownership structure on profitability (ROI). These results confirm and support the former results of Table 3. and Hypothesis 2 is not supported. Again. which also has an impact due to the uncertainty of the local economy as well as the external unstable environment. ownership structure has almost no influence on profitability. in a general conclusion. The study employed two model specifications in order to test the hypotheses. its effect on ROI is in total contrast to that on ROE. Table 4 describes the results of estimating the regression equation of profitability measured by ROI for the pooled sample as well as for each year separately. it can be concluded from Table 3 that firm size has negative impact. In contrast. As far as debt ratio is concerned. for the selected Industrial Companies of Jordan. in order to test the influence of the independent variables on profitability. This result comes out similar and confirms the results of Table 3. therefore supporting and confirming the regression results of profitability measured by ROE. Summary and Conclusion The primary aim of this study was to test the postulated hypotheses and to provide evidence with respect to the impact of firm structure to firm profitability. Viewing the pooled sample. firm age and ownership structure have almost no impact on profitability. However. using profitability measured by the Rate of Return on Equity (ROE) and the Rate of Return on Investment (ROI) along with other independent variables. This country went through a process of monetary adjustment and economic crisis. the difficulties are enlarged due to the unstability of the economic environment. ownership structure does not show a significant impact on the profitability performance. by examining such major factors as firm size. Thus. Thus. in 2001 a negative significant result is shown.

012 0.018 2. Thus.045 2. Hall et.036 0.896 0. 2000.146 β Constant logage Logsize Debt Govow Nongovow othow F value R Square 53 .320 0.316 0.662 -0.039 0.636 -1.650 1.120 -0. t-statistics β β Journal of Economic & Administrative Sciences t-statistics 1999 t-statistics 1998 t-statistics 1997 1.380 0.049 3. 2003).222 -0.946 1.044 0.257 It was hypothesized that larger size firms receive more attention from analysts and investors with a larger more option.274 0.035 1.247 0.005 1. Cassar & Holmes 2001.204 3. this result does not support the formulated Hypothesis 1.817 0.518 -0.101 -0.444 0.009 -2.447 -0.043 -0.626 -0.118 -1.681 -0.244 β β β t-statistics 1996 t-statistics 1995 Variable Name 1.000 -0.349 0.979 0.064 -1.109 -0.475 2.748 0.114 -2.025 -1.814 0.060 -0.229 -0.832 0.096 0.464 -1.023 0.901 1.470 0.243 1.615 -1.942 -0.176 -0. as the dependent variable) (n = 48) β All Samples -0.630 0.021 0.372 0.537 1.245 0.017 0.093 -2.244 0.222 -0.095 -0.049 -0.153 0.511 0.007 0.359 -0.347 0. al. al.001 0. a significant negative impact has been found at the 0.946 1.152 0.144 β -0.635 0.405 -0.032 0.275 0.451 0.892 0.915 0.558 0. 1999.773 -1. 1996.924 -0.070 0.296 0.631 0.093 0.006 0.944 -1.062 1.043 0.020 1.010 -1.009 1.05 level in Table 3. This idea is supported by (Baumol.168 -0.753 0.759 1.018 t-statistics t-statistics t-statistics 2001 t-statistics 2000 β β 2002 β 2003 2.074 0.075 0.221 0. al.758 3.047 1.027 0.004 0.457 -0. However.669 0.751 1.114 -1.043 0.024 0.144 -1. However.216 0.396 -2.024 0.006 0.049 0.681 -1. this conclusion is in conformance with the work of (Dhawan.115 0.649 -3.700 1. Michaelas et.923 0.530 -0.874 1.968 1.053 1.081 0. Chittenden et.897 0.055 -0.136 0.983 -1.605 1.009 0.628 -0.649 3.044 -2.111 0.107 1.428 -1.483 2.522 0. 1959.767 0.043 -1.011 -0.070 1.039 -0.147 0.010 -0.809 -0.539 0.208 -2.012 -0.June 2006 Table (4): Regression Analysis for Firm Structure and Profitability (Model 2– ROI.993 -0.027 -0.532 t-statistics 2004 -0.292 -1.705 3.778 0.962 -1.098 0.638 0.142 0.430 -0.999 0.296 1.001 0.341 2.628 -0.077 1.119 0.017 -0. and hence increased profitability.525 2.

2002) concluded that debt does not concede tax benefits. even though Table 4 shows a much lower impact. However. The result does not fully support the postulated Hypothesis 2. In Conclusion. that debt ratio positively affects firm profitability. Chittenden et. the results indicate that some of the independent variables considered in this study have weak impacts on profitability. Abdulsalam Abu-Tabanjeh June 2006 2001) who also found a negative relationship between firm size and profitability. ownership structure has almost no impact on profitability. Myers. The results of this study shows that debt had a great positive impact on profitability as shown in Table 3. Michaelas et. The empirical findings of this study suggest that firm structure emerges as an important factor affecting profitability. it is suggested that smoothing and successful firms’ improvement rely much on the effectiveness of the national level policies and plans for structural 54 . 1984. al. the results appear to indicate that debt ratio is a useful factor influencing firm performance. Many researches give mixed results on such a relationship. the non-government ownership shows a little impact albeit not significant. these findings have an interesting policy implication. Further. 1999. al. Studies like (Graham. al. Referring the firm age as a variable affecting the profitability. that firm ownership had a positive impact on profitability as it has only a very low insignificant positive impact. The uncertainty of the local economy as well as external instable environment might also convey operational and financial risks that hinder the managerial planning and encourage the adoption of more risky debt politics. This could be a result from the lack of indicators that could approximate idiosyncratic firm competencies such as organizational knowledge or instability of the monetary rate politics. 2000. this result supports the formulated Hypothesis 3. Provided these finding are confirmed in national contexts. However. the current study extends the very interesting discussion about the influence of debt ratio on firm profitability. McNutty et. Hence. the study shows an insignificant result which implied that firm age does not affect the profitability of a firm. 1996. 2000) called the “tunneling” effects where the controlling shareholders transfer out resources from the firm for their own private benefits at the expense of minority shareholders. which may add to the ongoing debate on the issues of firm structure and the firm profitability relations. whereas (Fama & French. Therefore. al. Furthermore. 2003) provided that profitable companies present a low debt rate. These findings should be useful to the managerial authorities to decide on the extent to which firm structure needs to be monitored and controlled. This could result in what (Johnson et. Cassar & Holmes. 1998.Dr. Hypothesis 4 was not supported. Specifically.

using Return on Investment (ROI) and Return on Equity (ROE). income statement. debt ratio. there are several lines of research which could be undertaken as a follow up on this paper: (a) adding more variables to study the relationships between firm structure and profitability.g. e. and Jordanian shareholding company's guide. and (c) Examination of the impact of industrial market structure and firm conduct in a homogeneous sample.. The database employed is unique and reliable consisting of the annual balance sheets. Given the limitations mentioned above. The measurements of profitability are consistent with those used in previous studies.Journal of Economic & Administrative Sciences June 2006 adjustment on specific actions. audit reports. ownership structure and firm size as the only independent variables affecting profitability was dictated by the available data sources. The validity and the generalization of the conclusions mentioned are pending future research in other industries or sectors that ratifies or refutes them. or stock exchange. economic cycles. this study measured firm size by sales and the choice of firm age. 55 . (b) improved ways to measure / detect profitability as well as investigate it in different contexts. As for limitations. different time periods.

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‬ﻭﻗﺩ ﺘﻭﺼﻠﺕ ﺍﻟﺩﺭﺍﺴﺔ ﺇﻟﻰ ﻨﺘﻴﺠﺔ ﻤﻔﺎﺩﻫﺎ ﺃﻥ‬ ‫ﺨﺼﺎﺌﺹ ﺍﻟﺸﺭﻜﺎﺕ ﺍﻟﺼﻨﺎﻋﻴﺔ ﺘﺅﺜﺭ ﻋﻠﻰ ﻤﻌﺩﻻﺕ ﺍﻟﺭﺒﺤﻴﺔ ﻓﻲ ﺸﺭﻜﺎﺕ ﺍﻟﻌﻴﻨﺔ ﺍﻟﺘﻲ ﺨﻀﻌﺕ‬ ‫ﻟﻠﺩﺭﺍﺴﺔ‪ ،‬ﻭﺇﻥ ﻜﺎﻥ ﻫﺫﺍ ﺍﻟﺘﺄﺜﻴﺭ ﻀﻌﻴﻔﺎ ﻤﺎ ﻋﺩﺍ ﻨﺴﺒﺔ ﺍﻟﻤﺩﻴﻭﻨﻴﺔ‪.‫‪Journal of Economic & Administrative Sciences‬‬ ‫‪June 2006‬‬ ‫ﺩﺭﺍﺴﺔ ﺘﻁﺒﻴﻘﻴﺔ ﻋﻥ ﺍﻟﻌﻼﻗﺔ ﺒﻴﻥ ﻫﻴﻜل ﺍﻟﻤﺅﺴﺴﺔ ﻭﺭﺒﺤﻴﺘﻬﺎ ‪ :‬ﺤﺎﻟﺔ ﺍﻷﺭﺩﻥ‬ ‫ﺩ‪ .‬ﻋﺒﺩ ﺍﻟﺴﻼﻡ ﻤﺤﻤﻭﺩ ﺃﺒﻭﻁﺒﻨﺠﺔ‬ ‫ﻜﻠﻴﺔ ﺇﺩﺍﺭﺓ ﺍﻷﻋﻤﺎل ‪ -‬ﺠﺎﻤﻌﺔ ﻤﺅﺘﺔ‬ ‫ﻤﻠﺨﺹ‬ ‫ﻴﻬﺩﻑ ﻫﺫﻩ ﺍﻟﺒﺤﺙ ﺇﻟﻰ ﺒﻴﺎﻥ ﺃﺜﺭ ﻫﻴﻜل ﺍﻟﺸﺭﻜﺎﺕ ﺍﻟﺼﻨﺎﻋﻴﺔ ﻋﻠﻰ ﺍﻟﺭﺒﺤﻴﺔ‪ ،‬ﻭﺘﻡ ﺍﺴﺘﺨﺩﺍﻡ ﻤﻌﺩل‬ ‫ﺼﺎﻓﻲ ﺍﻟﺭﺒﺢ ﻤﻨﺴﻭﺒﺎ ﺇﻟﻰ ﺤﻘﻭﻕ ﺍﻟﻤﻠﻜﻴﺔ ﻭﺼﺎﻓﻲ ﺍﻟﺭﺒﺢ ﻤﻨﺴﻭﺒﺎ ﺇﻟﻰ ﺇﺠﻤﺎﻟﻲ ﺍﻷﺼﻭل ﻜﻤﻘﺎﻴﻴﺱ ﻤﻌﺒﺭﺓ‬ ‫ﻋﻥ ﺍﻟﺭﺒﺤﻴﺔ‪ ،‬ﻭﻜﺎﻨﺕ ﻤﺘﻐﻴﺭﺍﺕ ﺍﻟﺩﺭﺍﺴﺔ ﺍﻟﻤﺴﺘﻘﻠﺔ ﻫﻲ ﺤﺠﻡ ﺍﻟﺸﺭﻜﺔ‪ ،‬ﻋﻤﺭ ﺍﻟﺸﺭﻜﺔ‪ ،‬ﻨﺴﺒﺔ ﺍﻟﻤﺩﻴﻭﻨﻴﺔ‬ ‫ﻭﻫﻴﻜل ﻤﻠﻜﻴﺔ ﺍﻟﺸﺭﻜﺎﺕ‪ ،‬ﻭﺸﻤﻠﺕ ﻋﻴﻨﺔ ﺍﻟﺩﺭﺍﺴﺔ ‪ 48‬ﺸﺭﻜﺔ ﻤﺩﺭﺠﺔ ﻓﻲ ﺴﻭﻕ ﻋﻤﺎﻥ ﺍﻟﻤﺎﻟﻲ ﻭﻏﻁﺕ‬ ‫ﺒﻴﺎﻨﺎﺕ ﺍﻟﺩﺭﺍﺴﺔ ﻓﺘﺭﺓ ﺍﻟﻌﺸﺭ ﺴﻨﻭﺍﺕ ﻤﻥ ‪ 1995‬ﺇﻟﻰ ‪2004‬ﻡ‪ ،‬ﻭﺘﻡ ﺍﺴﺘﺨﺩﺍﻡ ﺃﺴﺎﻟﻴﺏ ﺍﻹﺤﺼﺎﺀ‬ ‫ﺍﻟﻭﺼﻔﻲ ﻭﺍﻻﻨﺤﺩﺍﺭ ﺍﻟﻤﺘﻌﺩﺩ ﻻﺨﺘﺒﺎﺭ ﻓﺭﻀﻴﺎﺕ ﺍﻟﺩﺭﺍﺴﺔ‪ .‬‬ ‫‪59‬‬ .

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