«The Impact of Financial Structure, Financial Leverage and Profitability on Industrial Companies Shares Value (Applied Study on a Sample of Saudi ...»
3.5 Population and sampling The study population consists of all industrial public shareholding companies listed in Saudi stock market 57 Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.1, 2014 amounting 46, a random sample was selected from study population amounting eight companies, which have been adopted to represent all industrial sectors
3.6 Study Variables:
Study variables are quantitative which were measured by using financial well-known methods. The variables
have been identified as follows:
1- Share market price:
Company’s share price increment in the financial market is considered as a strategic objective for financial management, and lead to an increase in shareholder wealth, since as long as an increase in companies shares market value in the market as long as company’s value is increased. This dependent variable will be measured in this study by the market value of company’s share in the market.
Financial structure includes the addition of capital structure and the rest of the liabilities side represented by short-term financing sources, so the capital structure is equal to long-term liabilities and equity, this independent variable has been measured in this study through the total long-term liabilities and equity.
3-Financial Leverage Financial risks are related with financing decisions. this means selection the mix that forms its financial structure, so if the company is able to invest the borrowed funds with a return that exceeds the borrowing cost, then it can increase the return on equity, this is called trading with equity, this independent variable has been measured in this study by dividing liabilities of third party on total assets.
4-Profitbility Company’s profitability reflects management efficiency in achieving profits from its operating assists;
consequently, investors can judge management efficiency, especially if such judgment is measured through distributed dividends to net profits.
This independent variable was measures in this study through net profit rate to Return on Equity ROE, which reflects management ability to achieve profits.
3.7 Study Model In light of study variables which was reviewed before, and to answer the questions that have been introduces in
study problem, the model can be formulated as follows:
Study variables were measured as follows:
1- Stock price as dependent variable was measured by company’s st0ck market values at the end of each year.
2- Capital structure as independent variable was measured through total long-term liabilities and equity.
3-financial leverage was measured as an independent variable through debt short-and debt to total assets.
4- Profitability as an independent variable was measured through Return on Equity (ROE).
Accordingly, the study model is as follows:
Market value = Bo + B1 Liabilities + B2 Debt Ratio + B3 ROE + E
4. Theoretical framework
4.1 Financing structure Financing structure refers to all types of funding sources used in financing the project total assets, so it is different from capital structure, which is represented by institution permanent funding elements, which includes equity and long-term loans? Therefore, project capital structure is a part of its funding structure.
(Yahyaoui.2002, p. 90) There are various types of available funding sources for businesses organizations that 58 Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.1, 2014 take several classifications vary from one writer to another according to classification target. There are those who depend on ownership criterion and thus differentiate between private funds and debts. And there is who divide these sources to traditional and modern, according to their appearance, taking into account recent trends regarding traditional securities. (Mohammed, 2010, p. 8).
Financial managers seek to achieve ideal capital structure for the project through the use of appropriate funding combination that leads to reduce financing cost to its minimal limit and increase shares market value. (Akintoye & Taylor, 1998).In contrast, financing funds concentration in a single source, which is owners money leads to in appropriate capital structure. The inappropriate capital structure is deemed inappropriate when it does not affect the project mark value (Singhania and Seth, 2010). There are several factors that affect the formation of funding structure within the project. Some is internal based on the use of a combination of funding includes external debt and common and preferred shares, according to these projects needs of funding in addition to the quality of available investment opportunities to these projects. This is made through an exchange policy between risk and return and to conduct in-depth studies and for project financing and financing available investment alternatives needs in addition to study cost of each alternative funding in addition to study operational risk and management acceptance degree of risks surrounding and tax impact and the extent of tax benefits for alternative funding to another, as well as taking into account the flexible financing structure, on the other hand, there are external factors that affect financing structure and include lenders sensitivity to company high indebtedness of, and industry nature in which it operates in terms of competitiveness, growth and stability of sales and profits, and assets value. (Shlash, et al,.2008). All of these factors must be taken into account when designing project ideal financing structure, but practical status often differs, since actual and applied financing structure differs from ideal funding structure which management is trying to reach because of economic conditions, political and social variables the project has and therefore the weighted cost of funding sources are not in their minimal limits (Deiranieh 1992).
4.2 The concept and importance of financial leverage and financing structure theories Financial leverage refers to use third party funds in financing in order to increase operating profit and taxes, which is loans ratio to total liabilities ( Hawari,.1996, p.166) and financial leverage degree measures company's exposure level to financial risk, and it also reflect the change degree in earnings per share of operating profits resulting from earnings operating rate change before interests, and it is also defined that the use of others funds(EBET), (Akintoye & Taylor, 1998). and taxes to achieve additional profits that benefited the company’s owners, so it depends on borrowing to finance company's operations in order to achieve a return that increases owners profits. The financial leverage degree is increased by increasing use of external financing sources, and financial leverage can be increased by non-traditional financial instruments, such as the use of financial opti0ns and futures contracts. ( Fahmi.2008, p.52), some consider financial leverage as one if the terms invented by institutional mental for packaging undesired or negative things or to give a nice appearance, instead of saying borrowing or indebtedness which is a term that inspires risk and weakness we say financial leverage term that inspires confidence and strength. (Nibal, Qasaba, 2010, p 8). In general, the company needs of short-term financing depends on sales growth rate in addition to company's efficiency and effectiveness degree in managing company's working capital, and on long-run short term financing needs may to long-term financing, so management of any Project should made periodical evaluation for financing structure and determine the extent dependence on debt funds in financing. According to Anandhi et al(1999), the justification of financial leverage existence is project earnings achievement before (interest and taxes higher than the cost of funding and the increase or decrease in operating profits financing cost l will lead to an increase or decrease) in return on equity. Some companies may reduce leverage level in order to reduce the risk level or because of unwillingness in adopting compressed financial policy in order commit toward debt holder (Jensen, 1986). In contrast Harris and Raviv, (1988) and Stulz, (1988), indicated that companies management may be forced to increase leverage at higher rates than the ideal rates in order to maintain control and voting power of old shareholders and thus reduce the likelihood of external control and that this policy will lead ultimately to enhance and strengthen those companies performance. In all cases, companies must study the efficiency of its operations and financing, and environmental conditions surrounding before deciding on leverage, because leverage is double-edged sword, so it can lead to achieve best results when they are characterized by operational and financial efficiency, and when circumstances surrounding the company's are suitable, its use can also lead to negative results if things were not as desired (Ali Younis Ibrahim, 2010, p. 46). As well as the leverage is considered one of the factors that affects the shape and nature of financing structure within the project.
5. Literature Review Jameel (2013) study aims at testing the impact of financial leverage on the performance of firms listed at Palestinian Security Exchange according to accounting performance measures namely return on assets (ROA),
return on equity (ROE), return on sales (ROS), sales growth, and market value of the firm measured by Tobin's q. On the other hand, the research is an attempt to know which one of them is more influenced by the financial leverage. The sample of the study consisted of (20) corporations listed on the Palestinian Exchange Security during the period 2004-2011. The research used the multi regression in order to analyze and test the hypothesis.
The study revealed that the financial leverage has a negative impact on accounting performance measures, and the market value of the firms according to Tobin's q and this impact extends for several subsequent years.
The study recommends that the Palestinian corporations management should make financial study and evaluate the financial structure in order to reach the best optimal ratio of leverage within the financial structure to ensure that the positive impact of leverage on the financial performance and the market value of these companies, and enacting economics laws that allow to Palestinian corporation to use loan bonds and other financial instruments that allow for multiple alternatives to these corporations while using leverage in funding.
Alroud (2013) study aimed to investigate the impact of solvency of financial market value of share price in Jordanian commercial banks. To achieve these objectives financial ratios of solvency of financial short-term and long-term and coverage ratios solvency of the financial statements of commercial banks Jordanian from 2001 till the year 2010 were collected. The study sample consisted of Jordanian commercial banks amounting (15) banks listed in Amman Stock Exchange. Simple Regression Analysis was used to test independent variable (solvency), and shares market value. The study concluded that the proportion of cash solvency short term has been interpreted to (0.79) of the whole variance of the market value of the stock price, and that the ratio of debt to total equity of financial solvency long-term has been interpreted to (0.60) of the variance total market value of the share price, while the effect of variable Interest Coverage of solvency cover interest and taxes on the market value of the share price is weak, where interpreted to (0.24) of the variance total market value of the stock price, and recommended the study ran banks Jordanian business need to take into account the interest rate, because of its impact on benefits.
Abdallah Barakat (2012) study investigates the trends of working capital management (aggressive and conservative policies) and its effect on firms’ profitability and value. Using annual data for 59 industrial firms listed in Amman Stocks Market for the period of 2003 to 2011, the results show that following conservative investment policy by having high level of short term investment have positive effect on the firm’s profitability and value. However following the aggressive financing policy has a negative impact on the firm’s profitability and value. Finally, this study finds that firm Size, firm Growth and Growth Domestic Production (GDP) Growth has a positive impact on the firm’s profitability and value with no effect of financial leverage, but financial leverage have a significant effect on firm value.
Islam (2012) study aimed at revealing the impact of the financial structure of adverse group of Jordanian public shareholding companies listed on Amman Financial Market on profitability represented by earning per share (EPS), and on policies of the distributions of profits represented by Dividends per Share (DPS). In order to achieve the objectives of the study, this researcher used the published financial data of a random sample of (75) companies for the period 2007-2009. The necessary data to conduct the study, namely, the financing structure expressed by debt, the corporate profitability expressed by earning per share. Statistical methods were used to analyze the data, specifically simple regression by using the statistical package SPSS Version 18. In addition, other methods were used such as the descriptive statistics method (mean, standard deviations, the highest value,
lowest value). The study concluded the following results:
-There is no relationship statistically significant between the independent variable represented by debt (DR) and the dependent variable represented by earnings per share (EPS). However, the relationship between these two variables (DR and EPS) varies between the different sectors represented in its correlation coefficient (R).They also differ in direction represented by the type (R) positive or negative. The results also showed that the ability of manager of Jordanian public shareholding companies to use debt for generating profits varied as per sector.