«The Impact of Financial Structure, Financial Leverage and Profitability on Industrial Companies Shares Value (Applied Study on a Sample of Saudi ...»
Second, the study showed there is no statistically significant relationship between independent variable (DR) and the dependent variable policies of dividends (DPS). The study shows that the ratio of distributed dividends between the three sectors is varied. The Financial Sector ranked first in the proportion of dividends distributed to its shareholders. This indicates that the manager in the other two sectors (Industrial and Service companies) have failed in using the borrowed money to make profits and thus in their ability to distribute dividends to their shareholders.
Sumayya (2012) study is trying to find out the impact of the financial structure on financial decisions in small and medium enterprises. The research also aims to try to build an empirical model that measures the relationship between various financial decisions and financial structure in small and medium enterprises... To achieve this purpose, a field study was carried out over a sample of small and medium enterprises in Warqla state (in Algeria) through the study of financial structure impact on study sample institutions financial decisions. The study concluded that there is a direct correlation between borrowing and investment decision, while the decision of the distribution loses its meaning in small and medium enterprises.
60 Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.1, 2014 Akhtar, et al.,(2012) study aimed to measure the impact of leverage on corporate financial performance applied on oil and energy companies sector.The study tested a hypothesis that states : companies with high rates of profitability are seeking to increase leverage., The study examined the effect of leverage on rate of return on assets index of, return on equity, the number of times to cover benefits and debt, the ratio of dividends to equity, and net operating profit, and growth in sales, earnings per share The results showed that financial leverage leads to improve companies financial situation, thereby increasing the chances of growth within the sector in which they operate.
Hashemi and Zadeh, (2012) study aimed to test the effect of financial leverage on dividend policy. The research sample consisted of 74 public joint stock company of the companies listed on Tehran Stock Market in the period between 2003-2010.The study used multiple regression to test the hypotheses.The results show that there is a reversed correlation between financial leverage and dividend policy and therefore, the companies that have high leverage will distribute less profits to shareholders when compared to companies with low leverage.
Subai'i (2012) study examines the relationship between financial leverage and return on assets at the level of each sector of the three economic sectors of the Kuwaiti economy. The study sample consisted of (54) companies from the Kuwaiti public shareholding companies. The study concluded that there is a positive relationship between financial leverage and return on investment for all economy sectors.
Al Nuaimi et al (2011) study aimed to investigate the impact of funding mix in the market value of insurance companies listed in Jordanian Amman Financial Market. The study sample consisted of insurance companies listed in Amman Stock Market in order to test the effect of leverage on each of common stock return on, return on equity and earnings per share of dividends and company market value. The study used the simple regression and multi- path analysis to test the relationship between the variables.The study concluded that leverage and return on equity have no effect with a statistically significant in insurance company’s shares market value in Jordan.
Al Taleb, and Al Shubiri (2011) study examines profitability, growth in investment opportunities, assets size, and liquidity variables. The study linked these variables with debt ratio with study sample.The study sample consisted of (60) industrial company listed in Amman Stock Market.The study results showed that the debt ratio has a positive relationship with growth rate in total assets, while it has an inverse relationship with liquidity and structural assets, in contrast the study showed that growth in investment opportunities variable has a positive relationship with long-term debt, and that assets size variable has appositive relationship with longterm debt and an inverse relationship with short-term debt, and the study also showed that profitability and liquidity variable has no relationship with change in debt size.
Mahira Rafique, (2011) study aimed to investigate the effect of firm profitability and its financial leverage on capital structure in automobile sector companies in Pakistan. To achieve the research goals the capital structure of 11 listed firms has been analyzed by adopting an econometric framework over a period of five years. By estimating regression analysis and checking the relationship of estimated model through Correlation Coefficient Test, the study found that the profitability of the firm and its financial leverage have no significant impact on the capital structure of the studied firms during the examined period. In addition there is no any significant relation between profitability and financial leverage on the capital structure of a firm.
Singhania and Seth, (2010) study aimed to link company’s characteristics with financing structure characteristics in an attempt to find a common denominator between company characteristics and financing method.The study sample consisted of 963 companies from companies listed in Bombay Stock Exchange during the period of 2004-2008. Company’s financial structure was analyzed and compared with the texts of various finance theories. The study tested a basic hypothesis that states there is a positive relationship between debt ratio at any time and a set of variables: company size, company's liquidity, company’s growth rate, the rate of company's debt coverage rate. The study concluded that there is an inverse relationship between debt ratio on one hand and company growth rate and company's liquidity, and the coverage rate of company’s debt on the other hand and there is a positive relationship between debt ratio and company size.
Aasia (2010) study aimed to investigate the extent of leverage and dividend policies effect for a sample of 403 companies listed in Karachi financial market for the period 2002 to 2008. Since leverage in the study is represented by debt ratio. The study showed that financial leverage has an effect in dividend policies. On the other hand the study showed that financial leverage has a negative on dividend distribution.
Stefan (2009) study aimed to find the relationship between the financial structure and monetary policies and their impact on assets value. The study sample consisted of 17 countries for the period 1986-2007. Results showed that financial structure affects monetary policies, which in its turn affect the assets prices of (residential real estate, stocks),.The study showed the impact of inflation in those policies and assets prices.
Dana (2008) study aimed to identify external and internal factors that affect stock return in Amman stock market.
The study population consisted of all companies in Amman Stock Market. The study sample consists of (60) companies. The study found that there is significant statistical relationship between inflation rate, Interest rate, 61 Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.1, 2014 Number of Employees, and the size of the company capital with Stock return, and no significant statistical relationship between Payment Balance sheet and stock return, and also no significant statistical relationship between the gross domestic product and stock return.
6. Data processing and hypotheses formulation In this part an applied study was carried out on a sample of industrial public shareholding companies in Saudi
Arabia, the study included the following:
1-the relationship between financial structure (Liabilities) and stock market price.
2-The relationship between financial leverage (Debt Ratio) and stock market price.
3-The relationship between profitability (ROE) and stock market price.
4-to find the multiple regression models for company's stock price through study data, on the following model:
M. Value = Bo + B1 Liabilities + B2 Debt Ratio + B3 ROE + E A sample was selected from industrial public shareholding companies listed in Saudi financial market to study
its financial statements during the period from 2009 until 2012, and these companies are:
FIBCO National Co. for Glass industries Alojian Saudi Industrial Investment Group Saudi International Petrochemical Company Saudi Kayan Petrochemical Saudi Paper Manufacturing SABIC
M. Value = 15.643 + 0.802 L – 0.067 Debt Ratio + 0.395 ROE * BO = (15.643) This figure means that the impact of other variables other than the study variables lead to increased share price with an average of 15.643 Riyals.
* B1 = (0.802), this figure means that if the capital structure is increased by one unit, this will lead to increase of company's value by ( 0.802 ) units, with the condition that all other variables in the model are constant, and that the relationship between this structure and company value is a direct correlation.
This enhances the first alternative hypothesis that there is an impact financial structure on company value.
*B2 = (0.216) This figure means that an increase in debt ratio ( financial leverage ) by one unit, will lead to increase company's value by ( 0.216 ) unit and all other variables in the model are constant, and this also indicates that there is a positive relationship between financial leverage and company value, which enhances the first alternative hypothesis that there is an impact of financial leverage on company value.
* B3 = (0.395) This figure means that an increase in return on equity rate by one unit, will lead to increase company's value by ( 1.973 ) unit, with all other variables in the model are constant, this indicates that there is a direct correlation between return on equity and company’s value, as companies with high profitability transmit a signal to investors that the operating, investment and financing management is good, which leads to increase their shares value in the financial market, and thus increase the company value.
7.4 Model parameters test
To test model parameters, T- test was used; the results were as shown in the following table:
Test results of model parameters Variable name T test Sig. Level Constant 2.664 0.05 Financial structure 10.829 0.000 Leverage -0.862 0.437 ROE 4.935 0.008 The table above indicates that the independent variables represented by return on equity and capital structure are significant with a confidence level more than (95%), and the model cannot be adopted without it, while the independent variable represented by leverage is not significant at a confidence level of 95%, which indicates
the use of the model without it. Therefore the model can be used as follows:
M. Value = 15.643 + 0.802 L + 0.395 ROE
7.5 Simple Regression To test the hypotheses that have been formulated before, and to determine the effect of the independent variables on the dependent variable (the company value), simple regression has been used, the following table show the
Descriptive statistical measures for study variables Variable's Name B0 B T F R2 Sig Financial Structure 24.039 0.900 5.046 25.462 0.809 0.002 Financial Leverage 39.990 -0.093 0.229 0.52 0.009 0.827 ROE 13.499 0.463 2.058 4.235 0.414 0.008 First hypothesis Test Table above shows a positive relationship between capital structure and company's shares value, since R2 value is (0.809), and this means that (81%) of the variation in the dependent variable (company's shares value ), can be explained by the change in the capital structure. Since (Sig) = (0.002) which isles than ( 0.05 ), the null hypothesis is rejected and the alternative is accepted, this means that capital structure has an impact on company's shares value, therefore the relationship between financial structure and company value can be
written as follows:
M. Value = 24.039 + 0.90 Liabilities.
So the increase by one unit will increase the company's value by 0.90 units Second hypothesis Test Table above shows a n inverse relationship between leverage and company's share value, since R2 value is (0.009), and this means that (0.9%) of the variation in the dependent variable (company's value ), can be explained by the change in the leverage (debt ratio).
Since (Sig) = (0.827) which is more than (0.05), the null hypothesis is accepted, this means that Third hypothesis Test Table above shows a positive relationship between return on equity and company's value, since R2 value is (0.414), and this means that (41.4%) of the variation in the dependent variable (company's value ), can be explained by the change in return on equity. Since (Sig) = (0.008) which is less than ( 0.05 ), the null hypothesis is rejected and the alternative is accepted, this means that return on equity has an impact on company's value,
therefore the relationship between return on equity and company value can be written as follows:
M. Value = 13.499 + 0.463 ROE So the increase of return on equity by one unit will increase the company's share value by 0.463 units.
The study concluded a number of results represented in:
1-There is a statistically significant direct relationship between two independent variables: the return on equity and capital structure and the dependent variable represented by market stock price. However, there is a weak and reverse relation between leverage and stock value, and this relationship is not significant, so there is no statistically significant relationship between financial leverage and company’s value.
2-There is a positive relationship between capital structure and return on equity upon multiple regression analysis, it was shown that the strongest relationship was between capital structure and dependent variable (company’s stock value).