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The Impact of the Capital Structure on Financial Performance: An Applied Study on the Saudi Basic Materials Companies

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  • Mwafag Mohammad Rabab'ah

Abstract

This study aimed to measure the impact of the capital structure on the financial performance of basic materials companies listed on the Saudi Stock Exchange (Tadawul) during the period (2014-2021). The study relied on a number of independent variables to measure financial performance (the ratio of total debts to total assets, the ratio of Total debt to equity, the ratio of long-term debt to total assets), and ROE was used as an independent variable to measure financial performance. The study targeted all Saudi public shareholding basic materials companies listed in the Saudi financial market, a sample of (42) companies were selected, which represent the study population. To verify the acceptance or rejection of the study’s hypotheses, the descriptive statistics method was followed, and the multiple linear regression model was used. The researcher concluded that there is a positive and statistically significant effect of the total debt to the equity of the study sample companies, and the absence of a significant effect of (total debt to total assets and long-term debt to total assets) on the financial performance. The study recommended that Saudi companies should use both short-term and long-term debt to finance their operations, which has a positive impact on financial performance. The study also recommended the Saudi Capital Market Authority to issue guidelines for Saudi public shareholding companies that contain the advantages that companies obtain from managing the capital structure with high efficiency and its repercussions on financial performance.

Suggested Citation

  • Mwafag Mohammad Rabab'ah, 2022. "The Impact of the Capital Structure on Financial Performance: An Applied Study on the Saudi Basic Materials Companies," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(6), pages 1-77, June.
    • Handle: RePEc:ibn:ijefaa:v:14:y:2022:i:6:p:77
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    References listed on IDEAS

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    1. Harris, Milton & Raviv, Artur, 1991. "The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    2. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    4. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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