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Capital Structure and Market Power: Evidence from Jordanian Banks

  • Faris Nasif Al-Shubiri

    (Department of Finance and Banking, College of Business, Amman Arab University, Jordan)

This paper provides new insights into the way in which the capital structure and market power and capital structure and profitability are related. We used sample data of fourteen banks listed on the Amman Stock Exchange for the period from 2005 to 2008.We examine the dependent variable, which are expressed by total debt deflated by total assets, while the independent variables are Tobin Q, Growth, Profitability, Size, Ownership, Risk and Tangibility ratio. The OLS estimation results indicate that, at lower and higher ranges of Tobin’s Q, banks employ higher debt, and reduce their debt at intermediate range. This is due to the complex interaction of market conditions, agency costs, and bankruptcy costs. We also show the saucer-shaped relation between capital structure and profitability because of the interplay of agency costs, costs of external financing and interest tax-shield. We find that size tangibility variables have a positive influence both on capital structure and on the other hand on growth, while risk and ownership variables have a negative influence on capital structure.

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Article provided by University of Primorska, Faculty of Management Koper in its journal Managing Global Transitions.

Volume (Year): 9 (2011)
Issue (Month): 3 ()
Pages: 289-310

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Handle: RePEc:mgt:youmgt:v:9:y:2011:i:3:p:289-310
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  1. Heshmati, Almas, 2001. "The Dynamics of Capital Structure: Evidence from Swedish Micro and Small Firms," SSE/EFI Working Paper Series in Economics and Finance 0440, Stockholm School of Economics.
  2. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June.
  3. Pratomo, Wahyu Ario & Ismail, Abdul Ghafar, 2006. "Islamic Bank Performance And Capital Structure," MPRA Paper 6012, University Library of Munich, Germany.
  4. M. Ameziane Lasfer, 1995. "Agency costs, taxes and debt: The UK evidence," European Financial Management, European Financial Management Association, vol. 1(3), pages 265-285.
  5. Johnson, Shane A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 47-69, March.
  6. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
  7. David De Meza & David C. Webb, 2006. "Credit Rationing: Something's Gotta Give," Economica, London School of Economics and Political Science, vol. 73(292), pages 563-578, November.
  8. Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
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