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Liquidity Risk Mediation in the Dynamics of Capital Structure and Financial Performance: Evidence from Jordanian Banks

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  • Munther Al-Nimer

    (Department of Accounting, Business School, The Hashemite University, Zarqa 13133, Jordan)

  • Omar Arabiat

    (Department of Accounting, Business School, The Hashemite University, Zarqa 13133, Jordan)

  • Rana Taha

    (Graduate School of Business, University Sains Malaysia, Penang 11800, Malaysia)

Abstract

Maximising financial performance while maintaining adequate liquidity is a crucial and ongoing challenge for bank management, particularly in emerging markets. This study focuses on the relationship between capital structure and financial performance in Jordanian banks, with the mediating role of liquidity risk. Using panel data from 13 central Jordanian banks over the 2015–2022 period, we employ structural equation modelling (SEM) to analyse how capital structure ratios (equity-to-asset, debt-to-loan, and deposit-to-asset) influence financial performance metrics (return on assets and net income-to-expenditure ratio). Our findings reveal a significant positive association between capital structure and financial performance. However, liquidity risk fully mediates this effect. Capital structure primarily impacts performance by influencing a bank’s liquidity risk profile. Furthermore, the strength of this mediating effect is noteworthy—capital structure exhibits a statistically more robust association with liquidity risk than its direct impact on performance. This highlights the crucial role of managing liquidity risk within the complex dynamics of bank operations. This research makes a significant contribution to the existing literature by demonstrating the positive impact of capital structure on performance using the underlying mechanism through which this effect occurs. The insights of this research provide several implications for practice in the context of banking industries.

Suggested Citation

  • Munther Al-Nimer & Omar Arabiat & Rana Taha, 2024. "Liquidity Risk Mediation in the Dynamics of Capital Structure and Financial Performance: Evidence from Jordanian Banks," JRFM, MDPI, vol. 17(8), pages 1-19, August.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:8:p:360-:d:1456462
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    References listed on IDEAS

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