The effect of firm leverage on firm performance

Prepared by:

Abdullah alkahlout 20202404043

Nour abu hammad 20201404058
Raneem Daoud 20221404045

Under the Supervision of:

Dr.Abdulelah Albdour

Dr. Mohammad Alomari

July 2024

A thesis submitted to German Jordanian University in partial fulfillment of the requirements of

the bachelor’s degree of international accounting.

pg. 1
 Table of Contents:

Abstract .................................................................................................. 3

Chapter 1: Introduction ........................................................................... 3

Chapter 2: Literature review .................................................................... 6

2.1 Financial Performance Determinants .................................... 6
2.2 The impact of leverage .......................................................... 9
2.3 leverage and firms performance ............................................. 10
Chapter 3: Methodology ............................................................................ 13
3.1 Sample......................................................................................14
3.2 Variable measurement ............................................................ 15
3.3 Empirical model ..................................................................... 15
Chapter 4: Results ......................................................................................15
4.1 Descriptive statistics .............................................................. 15
4.2 Regression results ...................................................................16
Chapter 5: Discussion .................................................................................18
Chapter 6: Conclusion ................................................................................19

References ..................................................................................................21

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 Abstract

This study examines the impact of financial leverage on the performance of Jordanian manufacturing
companies, focusing on earnings per share (EPS) as the primary performance indicator. Utilizing data
from 36 companies listed on the Amman Stock Exchange for the fiscal year 2023 including
manufacturing and servicing company, the analysis reveals a positive and significant relationship
between leverage and EPS. The findings suggest that higher leverage can enhance firm performance in
the Jordanian manufacturing sector, providing valuable insights for stakeholders in optimizing capital
structure decisions.

Keywords: financial leverage, earnings per share (EPS), firm performance, Jordan, capital structure,
Amman Stock Exchange

1.Introduction

In the fast-paced world of finance, where risks can yield remarkable rewards or catastrophic losses,
one concept has stood the test of time as both a powerful tool and a double-edged sword: financial
leverage (Klein, 2001). Leverage can be defined as the amount that a company uses debt and equity
to finance its assets (Enekwe et al., 2014). In both established and developing economies, leverage
has become increasingly important. It is a useful instrument for managing financial crises. Paying
attention to leverage could result in fewer financial crises over the course of a century (Al Dabbas,
2023). Early forms of financial leverage emerged in various historical contexts, reflecting the need
for individuals and organizations to amplify their resources and potential return (Arhinful &
Radmehr, 2023). In ancient civilizations and medieval economies, trade often involved credit
arrangements and barter systems (Bei & Wijewardana, 2012). Merchants would extend credit to
one another, allowing for the purchase of goods and services without immediate payment. By using
future earnings or resources as leverage, this strategy made it possible to buy assets or make trades

pg. 3
 in the here and now (Sarkar, 2020). The historical development of leveraging methods to support
commerce, investment, and economic activities is highlighted by the early example of financial
leverage. The idea of leveraging resources and future earnings to generate current value is still a
fundamental notion in finance and trade, even though the tools and procedures have changed over
time (Papadimitri et al., 2021). The financial and economic landscapes underwent a dramatic
change with the Industrial Revolution (Long & Malitz, 1985). Businesses started to grow quickly,
necessitating large sums of money for development, infrastructure, and machinery purchases
(Giarto & Fachrurrozie, 2020) . More complex financial instruments, such bonds and preferred
stock, were developed during this time, allowing businesses to raise money from a wider range of
investors and better utilize their resources (Rayan, 2008).

The relationship between capital structure and financial leverage is intricate and multifaceted
(Graham et al., 2015). Capital structure refers to the mix of debt and equity that a company uses
to finance its operations and investments (Brown et al., 2021) . This strategic decision plays a
pivotal role in determining the financial health, risk profile, and performance of a firm. Financial
leverage, a key component of capital structure, involves the use of debt capital alongside equity to
fund business activities (Margaritis & Psillaki, 2007). In the dynamic landscape of modern
business, firms continually strive to optimize their capital structures to achieve sustainable growth,
enhance shareholder value, and manage risks effectively (Nissim & Penman, 2003). In order to
comprehend leverage dynamics and how they affect firm performance, a strong theoretical base is
necessary (Mandelker & Rhee, 1984). A pillar of contemporary finance theory, the
ModiglianiMiller theorem asserts that, under specific conditions, a firm's capital structure has no
bearing on its market value (Titman & Tsyplakov, 2007). But in real-world situations with taxes,
agency problems, bankruptcy expenses, and imperfect markets, leverage can have a big impact on
a company's cost of capital, risk profile, and performance (Miao, 2005). Building upon the
Modigliani-Miller framework, various theories have emerged to explain the effects of leverage on
firm value and performance. According to the trade-off hypothesis, businesses should weigh the
benefits of debt in relation to the expenses of financial hardship and agency conflicts to determine
the best capital structure for maximizing shareholder wealth (Serrasqueiro & Caetano, 2015).
Pecking order theory, on the other hand, suggests that organizations have a hierarchy of financing
preferences based on asymmetric information and signaling effects, with internal financing for

pg. 4
 example, retained earnings preferred over external debt (Abel, 2018). Additionally, agency theory
highlights the role of conflicts of interest between shareholders, managers, and creditors in shaping
leveraging decisions and organizational outcomes (Miao, 2005).The alignment of incentives,
effective corporate governance mechanisms, and transparency in financial reporting are crucial
factors that mediate the relationship between leverage choices and firm performance (Dalci,
2018).

There exists heterogeneity in the impact of leverage on business performance among different
industries, markets, and organizational environments (Pandey & Sahu, 2017). The results of
leveraging decisions are influenced by a variety of factors, including competitive landscapes,
market dynamics, regulatory environments, and industry dynamics (Hongli et al., 2019).For
example, long-term projects in capital-intensive industries like manufacturing and infrastructure
development might be financed primarily by debt, but technological companies might give priority
to equity financing in order to retain flexibility and innovation capabilities (Papadimitri, 2021).

Moreover, macroeconomic factors such as interest rates, inflation rates, and economic cycles can
impact the cost of debt, debt capacity, and debt servicing capabilities of firms, shaping their
leveraging strategies and risk management practices (Inam & Mir, 2014). The role of corporate
governance structures, board oversight, and executive compensation incentives also plays a critical
role in aligning leveraging decisions with long-term value creation and shareholder interests (De
Loecker & Goldberg, 2014).

A company's operations and financial activities' sustainability, profitability, and efficiency are all
reflected in its firm performance, which is measured using a variety of measures and indicators
(Dey et al., 2018). These measures frequently consist of operating margins, earnings per share
(EPS), return on assets (ROA), return on equity (ROE), and market value indicators including
market capitalization and shareholder returns (Yasmin ,2021) . Firm performance and financial
leverage have a complicated and dynamic relationship that is impacted by several variables,
including competitve positioning, economic conditions, industry dynamic and managerial
techniques (Huynh et al., 2022)..A detailed examination of how leveraging decisions affect
important performance drivers and overall organizational results is necessary to comprehend this

pg. 5
 relationship (Ahmed et al., 2018). In this study we focus on the financial leverage impact on
Jordanian listed companies, The Jordanian economy is characterized by its diverse sectors,
including industry, services, and agriculture (Samarah, 2023). It is considered one of the more
stable economies in the Middle East region. Jordan's economy is primarily driven by services,
including tourism, finance, and trade (Sadiq et al., 2023).

The impact of financial leverage on Jordanian companies depends on numerous factors such as the
company's financial management practices, industry dynamics, economic environment, and
regulatory framework. Balancing the benefits of leverage with the associated risks is essential for
sustainable growth and financial stability. This study investigates the impact of financial leverage
on firm performance in the presence of Amman stock exchange by applying statistical tools and
analyzing them. The main theme of this study is to find out that there is a link between leverage
and firm’s performance. This study answers the following question. What is the effect of firm
leverage on firm performance?

This thesis is organized into five chapters. Chapter 1 provides an introduction to the research
question, objectives, and significance of the study. Chapter 2 provides a comprehensive review of
the relevant literature on the topic, identifying gaps in the literature that this study aims to address.
Chapter 3 outlines the research methodology, including the research design, sampling strategy,
data collection and analysis methods. Chapter 4 presents the findings of the study, with a focus on
the relationship between firm leverage and firm performance in manufacturing and servicing
jordan companies. Chapter 5 provides a summary of the main findings, implications for future
research, and recommendations for practitioners and policymakers.

2. Literature review

2.1 Financial Performance Determinants

Constant performance improvement stands as the cornerstone goal of every corporation, as noted
by (Chandler, 1962) . This pursuit is not only pivotal for shareholders but also for scholars, as it
provides a platform to delve into the myriad factors influencing a firm's financial performance.

pg. 6
 Financial performance serves as a gauge of an organization's fiscal well-being and mirrors the
efficacy of its top leadership. As elucidated by (Almajali et al., 2012) ,heightened financial
performance signifies a company's adeptness in resource utilization, thereby bolstering its success
and efficiency, which in turn contributes to the broader macroeconomic landscape.The literature
discerns two primary facets of company performance: financial or economic performance and
inventive performance. Performance is no longer construed solely as a measure of organizational
efficacy but rather as an indicator of goal achievement (Cherrington, 1989). (Peterson et al., 2003)
underscore performance as a reflection of an organization's capability to efficiently employ its
resources to attain predefined goals while considering stakeholder interests. Subsequently,
performance has evolved into a barometer reflecting a business's developmental trajectory
(Peleckis et al., 2013). Given its significance, performance is meticulously measured and
determined, predominantly through avenues such as profitability. Recent research has unearthed
various factors influencing corporate performance. Investigations often focus on mechanistic
organizations, leveraging real-life examples. For instance, (Schiniotakis, 2012) identified factors
influencing profitability using data from 961 Australian enterprises, encompassing aspects such as
sluggishness, low productivity, inventiveness, firm size, and divisional impacts. Similarly, (Ozili,
2018) analyzed factors influencing the profitability of Indian business banks, discovering that
private sector banks exhibit moderately higher production and capabilities compared to their
counterparts. Notably, profitability emerges as a paramount consideration for both manufacturing
and service sectors when allocating investments (Olson & Slater, 2002). Firm size emerges as a
crucial determinant of performance.

Studies by (Vijayakumar & Tamizhselvan ,2010), (Papadogonas, 2007) ,(Lee, 2009) ,and (Amato
& Burson, 2007) elucidate the positive influence of firm size on profitability across various
contexts. However, (Falope & Ajilore, 2009) found no significant relationship between working
capital and firm performance in their study of 50 listed firms, underscoring the multifaceted nature
of performance determinants.

Ownership structure also exerts a profound influence on firm performance dynamics. Scholars like
(Burkart & Panunzi, 2006) found that outside ownership concentration tends to increase with the
quality of legal frameworks. Inside ownership, conversely, is positively associated with firm
growth but inversely related to firm size (Bohren et al., 2009). (Kaserer & Moldenhauer, 2008)

pg. 7
 further elucidated the positive impact of inside ownership on corporate performance, highlighting
its significant influence on managerial financial decisions.Capital structure, encompassing the mix
of debt and equity financing, emerges as a critical determinant of firm performance (Su & Vo,
2010). Effective risk management practices, alongside well-maintained ownership structures and
robust corporate governance frameworks, are pivotal in enhancing shareholder profitability
(Sarykalin et al., 2008).

Moreover, firm characteristics and policies play a significant role in shaping performance
outcomes. Factors such as size, growth rate and liquidity are intricately linked to firm performance
(Love & Rachinsky, 2007). (Succurro & Mannarino, 2014) highlighted how firms with higher
growth rates tend to invest in better machinery and attract superior management and employees,
thereby fostering mutual benefits for the company and its workforce. These insights underscore
the multifaceted nature of organizational performance dynamics and the interplay of various
factors in shaping firm outcomes.

The relationship between firm leverage and firm type or industry is a critical area of study in
corporate finance (Mohamad Ariff et al., 2007) ,as different industries and firm types often exhibit
varying capital structure characteristics and leverage levels (Chen et al., 2021). This relationship
can influence and be influenced by several factors, including industry-specific risks, growth
opportunities, asset structure, and profitability (Prime & Qi, 2013).

Different industries have unique financial dynamics. For example, capital-intensive industries like
manufacturing typically have higher leverage due to substantial fixed assets that can be used as
collateral (Islam & Khandaker, 2015). In contrast, technology firms may have lower leverage due
to high levels of intangible assets that are harder to collateralize (Menichini,2015).
Controlling for industry ensures that the specific characteristics of different industries do not skew
the results (Gungoraydinoglu & Öztekin, 2011).

pg. 8
 2.2 The impact of leverage

Leverage, often defined as the use of borrowed funds to invest and generate returns, has significant
implications for company risk and behavior (Cai & Zhang, 2011). High financial leverage typically
signifies increased riskiness for companies due to this practice.
Roychowdhury's study on genuine earnings management sheds light on the relationship between
leverage and financial practices (Roychowdhury, 2006). Analyzing data from firms listed on Bursa
Malaysia, Roychowdhury found a significant negative correlation between leverage and genuine
earnings management, suggesting that firms with higher leverage engage in less earnings
manipulation. This highlights the role of leverage in influencing the integrity of financial reporting.
Similarly, (Aivazian et al., 2005) discovered that leverage adversely affects investment decisions
for Canadian firms, particularly those with limited growth prospects. This indicates the nuanced
impact of leverage on different types of companies within varying economic contexts. (Modigliani
& Miller, 1958) challenged traditional notions by proposing that, in certain tax-free economies,
capital structure does not affect firm value, underscoring the complexity of leverage's effects.
Furthermore, leverage influences dividend policies, especially when leverage levels are high,
signaling greater risk in terms of cash flow (Eriotis & Vasiliou, 2004). Despite limited attention in
some countries, like Greece, dividend policy and its relationship with capital structure have been
explored, revealing positive correlations between dividend policies and key financial variables
(Eriotis & Vasiliou, 2004).

Theoretical perspectives on corporate debt further illuminate the dynamics of leverage. Myers
(1984) presents the conflict between the trade-off theory and the pecking order theory. The tradeoff
theory posits that firms determine their capital structure by balancing the benefits of borrowing,
such as tax savings, against the costs, including bankruptcy expenses (Frank & Goyal, 2008). In
contrast, the pecking order theory suggests that firms prioritize debt financing over equity
financing due to adverse selection concerns, with retained earnings serving as a secondary funding
source (Frank & Goyal, 2008). These theories offer insights into the complex interplay between
leverage, firm behavior, and financial decision-making.

pg. 9
 2.3 leverage and firms performance

Financial leverage and performance are fundamental concerns for businesses, with numerous
studies shedding light on their relationship. (Abu-Abbas et al., 2019) they found that there is a
negative correlation between financial leverage and firm performance used data from the Amman
Stock Exchange sample. Also, (Mukras, 2015) concluded that Financial leverage is a significant
negative predictor of financial performance using data from the companies listed in Kenya
.Furthermore, (Anis et al., 2022) discovered that financial leverage has a negative impact on the
financial performance of the non-financial firm, they used data from 100 top companies listed on
the Stock Exchange of Pakistan for the years 2011 to 2021. (Chen, 2020) conducted a study in
China, revealing a negative impact of increased financial leverage on company performance.
Analyzing data from 1079 Chinese listed enterprises over 2010–2019, their findings underscored
the detrimental effects of leverage on business outcomes. Similarly, (Vithessonthi & Tongurai,
2015) identified a negative correlation between leverage and company success across their sample.
Moreover, they found that the magnitude of this impact varies with firm size, with larger
enterprises experiencing a more pronounced effect compared to smaller firms, both domestically
and internationally. Further insights into this relationship were provided by (Ibhagui & Olokoyo,
2018) , who noted a diminishing negative impact of leverage on performance with increasing firm
size. This effect eventually disappears once the firm reaches a certain threshold level, with smaller
enterprises bearing the brunt of leverage's adverse effects. (Ali et al., 2022) also observed a
negative association between leverage and performance using panel data from 70 non-financial
Pakistan Stock Exchange companies over seven years (2010– 2016). Their analysis, focusing on
metrics such as return on equity (ROE) and return on assets

(ROA), underscored the significant impact of ownership structure on this relationship. (Raza,
2013) echoed these findings, revealing a negative correlation between leverage and performance
in their study of KSE-listed non-financial enterprises from 2004 to 2009. Employing panel data
analysis, they elucidated factors influencing capital structure and their implications for firm
performance. Additionally, (Ma'in et al., 2022) highlighted the detrimental impact of financial
leverage on the performance of Shariah-listed consumer products and services firms in Malaysia.
Investigating data from 2014 to 2018, their study underscored the challenges posed by leverage in

pg. 10
 this specific sector. These studies collectively underscore the importance of understanding the
nuanced relationship between financial leverage and performance, with implications for firms
across various industries and geographical locations.

Examining financial metrics such as return on assets (ROA) and return on equity (ROE) offers
valuable insights into how financial leverage impacts company performance. For instance, both
(Ali et al., 2022) and (Chen, 2020) identified a negative association between leverage and
performance, employing these financial metrics. However, (Chen, 2020) took a novel approach by
examining the moderating influence of operating leverage on the relationship between financial
leverage and business performance within Chinese industries. While insightful, this broad
industry-wide analysis may overlook nuances specific to firms of varying sizes. Thus, future
research could benefit from categorizing organizations based on size for a more granular
investigation. Furthermore, (Ali et al., 2022) study in Pakistan Stock Exchange, a developing
economy, offers unique insights distinct from those conducted in developed nations. The distinct
corporate governance system and cultural context of Pakistan contribute to nuanced findings
compared to previous research. Additionally, (Puri, 2023) emphasizes the importance of
considering both market-based and accounting-based measurements of performance. While (Ali
et al., 2022) solely focused on accounting-based metrics, incorporating market-based measures
would provide a more comprehensive understanding of a company's overall performance. By
considering investor sentiment, financial health, historical results, and future expectations, a
balanced approach to performance measurement can offer richer insights into the impact of
financial leverage.

Investigating the impact of financial leverage on firm performance through the lens of firm size
Provides valuable insights into this complex relationship. Researchers like (Vithessonthi &
Tongurai, 2015) and (Ibhagui & Olokoyo, 2018) have explored whether the effect of leverage on
business performance depends on firm size or remains independent of it. However, (Ibhagui &
Olokoyo, 2018) encountered limitations due to unconsidered factors and a narrow range of
thresholds and controls, highlighting potential data issues that may impact the reliability of their
findings. In contrast, (Vithessonthi & Tongurai, 2015) study reveals the nuanced impact of
financial leverage on firm performance, considering factors such as firm size and the degree of

pg. 11
 internationalization. Large domestically oriented firms tend to experience a more pronounced
negative impact on performance due to leverage, while large internationally oriented firms may
derive positive benefits from leverage. Another avenue to explore the relationship between
leverage and financial performance is through capital structure analysis. (Raza, 2013) discovered
that long-term debt, due to certain direct and indirect costs, can lead to reduced profitability. These
findings align with the pecking order theory, suggesting a compatibility between profitability and
capital structure decisions. (Circiumaru et al., 2010) further emphasizes the complexity of capital
structure decisions, acknowledging the multitude of factors involved and the inherent uncertainty
surrounding them. Overall, the interplay between financial leverage, firm size, and capital structure
underscores the intricacies of firm performance dynamics. While existing theories offer valuable
insights, addressing data limitations and considering a broader range of factors can enhance our
understanding of how financial decisions impact business outcomes.

On the other hand, a plethora of studies has delved into the relationship between financial leverage
and performance,recognizing these as pivotal considerations for businesses. (Dey et al., 2018)
conducted an investigation in Bangladesh, revealing a positive impact of financial leverage on
financial performance. Focusing on manufacturing companies listed on the DSE, their study,
spanning 17 years and involving 48 companies, sheds light on how financial leverage influences
performance in the local context. Similarly, (Hongli et al., 2019) discovered a strong positive
influence of the financial leverage ratio, utilizing 65% debt to finance assets, on company
performance metrics such as ROA and ROE. Their findings underscore the significant role of
leverage in driving firm performance to a considerable extent. (Iqbal & Usman, 2018) focused on
companies within the PSX 100-index, specifically Pakistan Textile Composite Companies, over a
five-year period from 2011 to 2015. Their research indicates that financial leverage positively
impacts firm performance, provided that the amount of debt does not exceed equity levels,
highlighting the importance of maintaining a balanced capital structure.

(Arhinful & Radmehr, 2023) aimed to explore the effect of financial leverage on firm performance
using data from 263 firms in the automotive and industrial producer sectors listed on the Tokyo
Stock Exchange between 2001 and 2021. Their study discovered that ROA, ROE, and EPS are all

pg. 12
 positively and statistically significantly impacted by the equity multiplier, shedding light on the
dynamics of financial leverage and performance. Additionally,
(Vithessonthi & Tongurai, 2015) examined 159,375 non-financial firms in Thailand during the
2007–2009 global financial crisis. While their full sample analysis showed a negative association
between leverage and firm performance, they found a positive impact of leverage for
internationally oriented firms, highlighting the nuanced effects of financial leverage across
different business contexts. Determining how financial leverage impacts a company's performance
typically involves assessing various financial measures such as return on equity (ROE), return on
assets (ROA), and earnings per share (EPS), alongside metrics like the debtassets ratio and debt-
equity ratio. For instance, (Dey et al., 2018) measured financial performance using ROA, ROE,
and EPS, while assessing financial leverage using the debt-assets ratio and debt-equity ratio. They
discovered that financial leverage had no effect on EPS, exhibited a negative correlation with
ROA, and had a positive influence on ROE. Conversely, (Iqbal & Usman, 2018) found that
financial leverage had a negative and significant effect on firm ROE, while also observing a
positive and significant effect on firm ROA. Their study provides insights into the nuanced impacts
of financial leverage on different performance metrics within a firm. Similarly, (Hongli et al., 2019)
demonstrated a strong positive impact of financial leverage on both return on assets and return on
equity. By highlighting these relationships, their findings underscore the significant influence that
financial leverage can exert on a company's financial performance, emphasizing the importance of
considering multiple performance metrics in understanding the effects of leverage.

H1: There is a significant negative correlation between firm leverage and firm performance

3. Methodology

3.1 Sample
Data was collected by combining secondary data sources through financial statements data that
included relevant information. The study used 36 manufacturing and servicing companies listed in the
Amman Stock Exchange (ASE) for the year 2023. The majority of the companies chosen are
manufacturing, and only 6 servicing companies were used. The ASE provides publicly accessible
information on listed companies, financial reports, corporate governance practices, and other relevant
data, highlighting the local relevance of ASE-listed companies. The use of quantitative data analysis

pg. 13
 methodology, particularly leveraging financial statements, is well-suited for investigating the leverage
effect on performance due to its ability to provide precise, objective, and statistically rigorous insights
into the relationship between leverage and firm performance.

3.2 Variable measurement

Dependent variable
The dependent variable used through the study is firm performance, which is measured by
profitability, through Earnings Per Share (EPS). Firm performance provides insights into the
company's financial health, operational efficiency, market competitiveness, and strategic
execution. Many studies have utilized firm performance as an dependent variable, like (AbuAbbas
et al., 2019), (Akhtar et al., 2012) and (Al-Taani, 2013).

Independent variable
The independent variable examined in the study is firm leverage, it measures through debt to equty
ratio. Previous studies have explored the relationship between firm leverage and firm performance,
employing a diverse array of variables in their analyses (Kaluarachchi et al., 2021).Most of the
studies have used debt to equity ratio like (Inam & Mir, 2014), (Javeed & Tabassam, 2018),
(Abubakar, 2016) and (Pandey & Sahu, 2017).

Control variables
Factors such as firm size, growth rate, liquidity, firm age and firm type are linked to firm
performance.
Firm size emerges as a crucial determinant of performance. In industries where competition is
necessary, large companies have greater pricing power than small businesses (Doğan, 2013). We
measured firm size through total assets.

To examine the relationship between Assets growth rate and firm performance we measured assets
growth rate through ( total assets 2023- total assets 2022 / total assets 2022).

Liquidity plays an important role on firm performance. A popular definition of liquidity is an

entity's capacity to convert its assets into cash as quickly as possible without losing value (Hongli
et al., 2019). We measured liquidity through the curent ratio ( curent assets / curent liabilities).

pg. 14
 Recent studies have revealed that a firm's age has a major impact on its performance (Raja &
Kumar, 2005). We measured the firm age through ( year 2023 _ Establishment year).

Firm type is an essential control variable in research on the effect of leverage on firm performance.
We have coded for manufacturing companies as 1 and for service companies as 2.

3.3 Empirical Model

Firm performance = B0 + B1 (firm leverage) + B2 (firm size) + B3 (growth rate) + B4 (liquidity)
+ B6 (firm age) + B7 (firm type) +- Erorr factor

4. Results

4.1 Descriptive statistics

Table 1 presents the descriptive statistics for the variables used in the study. The statistics include
the number of observations (N), minimum, maximum, mean, and standard deviation for each
variable. For our dependent variable firm performance, it measures through (EPS), the mean value
of the earnings per share is 0.2450 with a standard deviation of 0.37292. The minimum value of
the earnings per share is 0.01 and the maximum value is 1.82. For our independent variable firm
leverage it measures through (Debt to equity) we note that the mean value is 0.7961 and a standard
deviation is 0.79213. The minimum value is 0.07 and the maximum value is 2.90.

Table (1) Descriptive Statistics

N Minimum Maximum Mean Std. Deviation
EPS 36 .01 1.82 .2450 .37292
DTE 36 .07 2.90 .7961 .79213
Firm size 36 12.90 21.09 17.4220 1.45699

pg. 15
 Firm age 36 15.00 72.00 37.0556 17.82766
Firm type 36 1.00 2.00 1.3333 .47809
Liquidity 36 .43 11.76 2.8872 3.10841
Assets growth rate 36 -.11 .18 .0242 .07400

4.2 Regression results

The following tables present our regression results to test our hypothesis. Our hypothesis suggests
that there is a negative relationship between firm leverage and firm performance.

Table (2) coefficients

B Sig. Std. error Coefficient t p

BETA
DTE .248 .069 .527 3.601 .001
Ln_Firm_size .080 .033 .314 2.460 .020
Firm_age .009 .002 .441 4.486 <.001
Firm_type -.160 .082 -.205 -1.960 .060
Liquidity .005 .014 .046 .400 .692
Asset_growth_rate -1.368 .514 -.271 -2.660 .013
a. Dependent Variable: EPS

Table 2 represents the coefficients. Firstly, the R-squared value of 0.747 indicates that approximately
74.7% of the variability in the firm's performance, as measured by Earnings Per Share (EPS), can be
explained by the model. This high explanatory power suggests that the selected independent variables
are significant predictors of firm performance. The Debt-to-Equity (DTE) ratio shows a positive and
significant impact on EPS (β = 0.527, p = 0.001). This result contradicts the initial hypothesis (H1)
which posited a strong negative correlation between firm leverage and firm performance. The positive
coefficient implies that an increase in leverage, as represented by the DTE ratio, is associated with
higher EPS. This finding aligns with the trade-off theory, which suggests that debt can provide tax
shields and thus enhance firm performance, especially in a context where firms can manage their debt
levels efficiently without falling into financial distress. Firm size (Ln_Firm_Size) also exhibits a
positive and significant effect on EPS (β = 0.314, p = 0.020). Larger firms, due to their market power
and economies of scale, tend to perform better in terms of profitability. This supports the notion that
larger firms are more capable of leveraging their assets to generate higher earnings, benefiting from

pg. 16
 operational efficiencies and stronger competitive positions. Firm age (Firm Age) is another significant
predictor of EPS, with a positive coefficient (β = 0.441, p < 0.001). Older firms may benefit from
established market positions, accumulated knowledge, and experience, which contribute to better
financial performance. This is consistent with the resource-based view, which asserts that firms
accumulate valuable resources over time that enhance their performance. Interestingly, the coefficient
for firm type (Firm Type) is negative but marginally insignificant (β = -0.205, p = 0.060). This suggests
that there might be a difference in performance based on whether a firm is manufacturing or servicing,
with service firms potentially performing slightly worse. However, the near significance indicates that
further investigation with a larger sample size could provide more definitive insights. Liquidity (current
ratio) does not show a significant impact on EPS (β = 0.046, p = 0.692), indicating that short-term
solvency does not directly translate into profitability in the sampled firms. This could imply that firms
with high liquidity might not be utilizing their resources efficiently to generate earnings, or that
liquidity is not a crucial factor in determining EPS for the companies in this study. The Asset Growth
Rate is significantly negatively associated with EPS (β = 0.271, p = 0.013). This finding is intriguing
and suggests that rapid asset growth may initially strain a firm's resources or lead to inefficiencies,
thereby negatively impacting immediate profitability. This aligns with the notion that aggressive
expansion strategies may not always yield immediate financial benefits and could pose integration and
management challenges.

Table (3) Model Summary

model R R square Adjusted Std. error
R square of the
estimate
1 .864 .747 .694 .20612

a. Predictors: (Constant), Asset_Growth_Rate, DTE, Firm_Type, Firm_Age, liquidity,

Ln_Firm_Size

The regression model summary indicates the overall fit of the model. The R value of 0.864
suggests a strong correlation between the independent variables and EPS. The R Square value
of 0.747 implies that approximately 74.7% of the variability in EPS can be explained by the
independent variables included in the model. The adjusted R Square value of 0.694, which
accounts for the number of predictors in the model, also indicates a good fit. The standard error
of the estimate is 0.20612

pg. 17
 Table (4) Anova

Model Sum of df Mean square F Sig.

squares

Regression 3.635 6 .606 14.260 <.001

Residual 1.232 29 .042

total 4.867 35

a. dependent variable: EPS

b. predictors: (constant), Asset_Growth _rate, DTE, firm_type, firm age, liquidity, Ln_firm_size

The ANOVA results show that the model is statistically significant, with an F-statistic of 14.260
and a p-value of less than 0.001. This indicates that the independent variables, collectively, have a
significant impact on EPS.

5.Discussion

Our hypothesis regarding the adverse performance effects of the leverage effect has been refuted
by recent data collected from manufacturing firms in Jordan. Contrary to prior literature suggesting
a negative impact, the data demonstrates a positive association between leverage and performance.
This unexpected finding challenges existing theories and underscores the necessity for reassessing
our assumptions about the leverage effect's implications in this particular context. Several studies
have consistently demonstrated the positive impact of financial leverage on firm performance. Dey
et al. (2018) found a favorable influence of financial leverage on financial performance in
Bangladesh. Similarly, Hongli et al. (2019) identified a strong positive effect of the financial
leverage ratio on firm performance. Iqbal and Usman (2018) also concluded that financial leverage
enhances firm performance, provided that the amount of debt does not exceed equity levels,
highlighting the necessity of a balanced capital structure. These findings are in alignment with our
research, which similarly shows a positive impact of financial leverage on firm performance.

pg. 18
 6.Conclusion

Overall; this study investigates the influence of leverage on the performance of Jordanian domestic
manufacturing companies, focusing on earnings per share (EPS) as the dependent variable to assess
its impact on overall performance. Utilizing data from 36 companies in Jordan Listed in Amman
Stock Exchange, the analysis incorporates several control variables: debt to equity ratio, firm size,
firm age, firm type, liquidity, and asset growth. By examining these factors, the research aims to
provide insights into how financial leverage and other organizational characteristics affect EPS,
thereby contributing to a deeper understanding of financial performance dynamics within the
Jordanian manufacturing sector.

The analysis reveals a negative impact of firm type on EPS, indicating that certain industry sectors
or organizational structures may face inherent challenges in achieving high EPS levels. This
finding suggests that while some firms benefit from economies of scale, financial efficiency, and
longevity, others may struggle due to industry-specific factors or business models.

These insights highlight the complexity of financial performance determinants and underscore the
importance of a nuanced approach to financial analysis. Stakeholders can leverage these findings
to refine investment strategies, optimize capital structure decisions, and strengthen competitive
positioning within their respective industries. By understanding the interplay of these variables,
organizations can foster sustainable growth and enhance shareholder value over the long term.

It is important to acknowledge certain limitations in its application to contexts such as the Middle
East and specifically Jordan. One notable constraint is the scarcity of prior studies examining the
effects of leverage on firm performance within this region. This gap in literature poses a challenge
in contextualizing findings and deriving region-specific insights that are crucial for accurate
analysis and policy formulation. Additionally, the significant variance in company data across the
studied sample further complicates generalizations and requires careful consideration of contextual
factors influencing financial leverage and its outcomes. By addressing these limitations, future
research can better tailor analytical frameworks to regional dynamics, thereby enhancing the
applicability and relevance of findings to the Middle Eastern business environment.

pg. 19
 Our research paper makes a significant contribution to the existing literature by shedding light on
the impact of leverage on the performance of Jordanian companies, a topic that has been
underexplored in previous studies. By focusing specifically on Jordanian domestic manufacturing
firms and employing earnings per share (EPS) as a key indicator of performance, our study fills a
crucial gap in understanding how financial leverage influences business outcomes in this regional
context. Through rigorous analysis of data from 36 companies in Jordan, we not only provide
empirical evidence but also offer insights into the dynamics of leverage, including its effects on
profitability, risk management, and overall corporate strategy. This research enhances the body of
knowledge by offering a nuanced understanding of the factors shaping financial performance
within the Jordanian market, thereby guiding future research and informing strategic decision-
making among stakeholders in the region's business community.

It is recommended for future studies aiming to deepen our understanding of the relationship
between leverage and firm performance among Jordanian companies to expand the scope by
gathering data from a larger sample of firms. This would provide a broader perspective and
enhance the generalizability of findings across the industry. Additionally, incorporating more
comprehensive control variables beyond those considered in our study would enrich the analysis
and offer a more refined picture of the factors influencing financial performance. By expanding
both the dataset and the range of variables examined, future research can better capture the
complexities of leverage dynamics and its impact on business outcomes in the Jordanian context,
thereby contributing more robust insights to academia and guiding practical decision-making in
the corporate sector.

After conducting a thorough review of the existing literature on the impact of leverage on firm
performance, most studies have traditionally suggested a negative relationship between these
variables. However, our empirical analysis of Jordanian companies has yielded surprising results,
revealing a positive relationship between leverage and performance. This unexpected finding
challenges our initial hypothesis, which posited a negative association based on prior research
trends. The data from our study underscore the importance of considering regional contexts and
industry-specific dynamics when evaluating financial strategies and their implications for

pg. 20
 corporate outcomes. By demonstrating a positive linkage between leverage and performance in the
Jordanian context, our research contributes a novel perspective to the discourse on financial
management and highlights the need for nuanced interpretations that go beyond conventional
wisdom. Future studies should continue to explore these dynamics across diverse settings to refine
our understanding and provide actionable insights for businesses and policymakers alike.

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