IDEAS home Printed from https://ideas.repec.org/a/pal/palcom/v11y2024i1d10.1057_s41599-024-04211-x.html
   My bibliography  Save this article

The impact of firm size on the relationship between leverage and firm performance: evidence from Saudi Arabia

Author

Listed:
  • Nouf Alabdulkarim

    (King Saud University)

  • Lakshmi Kalyanaraman

    (King Saud University)

  • Hanan Alhussayen

    (King Saud University)

Abstract

Capital structure and its relationship with firm performance is one of the most debatable topics in corporate finance among both scholars and policy-makers. Using a panel threshold regression model, this study investigates the impact of firm size on the nonlinear relationship between the leverage and performance of Saudi listed firms from 2010 to 2019. The results reveal that firm size is critical in determining the nonlinear relationship between leverage and firm performance. A single threshold level divides the sample into two regimes of small and large firms. Leverage negatively affects performance in both regimes with different debt maturities. However, the negative impact is more pronounced among small firms, especially when long-term debt is employed. This study adds to the evolving literature because the unique setting of the Saudi market is characterized by its illiquid and underdeveloped bond market. Additionally, Saudi firms are not subject to income tax; instead, they are subject to zakat, which is levied at 2.5%. These characteristics impact the relationship between leverage and Saudi firm performance at different firm sizes. This study is important for financial managers, regulators, researchers, and investors to understand how leverage with different maturities affects performance and the role of firm size in this relationship.

Suggested Citation

  • Nouf Alabdulkarim & Lakshmi Kalyanaraman & Hanan Alhussayen, 2024. "The impact of firm size on the relationship between leverage and firm performance: evidence from Saudi Arabia," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-12, December.
    • Handle: RePEc:pal:palcom:v:11:y:2024:i:1:d:10.1057_s41599-024-04211-x
    DOI: 10.1057/s41599-024-04211-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41599-024-04211-x
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s41599-024-04211-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Rafiuddin Ahmed & Rafiqul Bhuyan, 2020. "Capital Structure and Firm Performance in Australian Service Sector Firms: A Panel Data Analysis," JRFM, MDPI, vol. 13(9), pages 1-16, September.
    4. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    5. Ibhagui, Oyakhilome W. & Olokoyo, Felicia O., 2018. "Leverage and firm performance: New evidence on the role of firm size," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 57-82.
    6. Khémiri, Wafa & Noubbigh, Hédi, 2020. "Size-threshold effect in debt-firm performance nexus in the sub-Saharan region: A Panel Smooth Transition Regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 335-344.
    7. Jamel Boukhatem, 2021. "What drives local currency bond market development in Saudi Arabia: do macroeconomic and institutional factors matter?," Future Business Journal, Springer, vol. 7(1), pages 1-18, December.
    8. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    9. Ilhan Dalci, 2018. "Impact of financial leverage on profitability of listed manufacturing firms in China," Pacific Accounting Review, Emerald Group Publishing Limited, vol. 30(4), pages 410-432, November.
    10. Shrabanti Pal, 2022. "Influence of Capital structure on Firm Performance: Empirical Evidence from Indian Manufacturing Industry," International Journal of Business Management and Finance Research, Academia Publishing Group, vol. 5(2), pages 100-110.
    11. Aamir Nazir & Muhammad Azam & Muhammed Usman Khalid, 2021. "Debt financing and firm performance: empirical evidence from the Pakistan Stock Exchange," Asian Journal of Accounting Research, Emerald Group Publishing Limited, vol. 6(3), pages 324-334, March.
    12. Joshua Abor, 2005. "The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 6(5), pages 438-445, December.
    13. Eman Fathi Attia & Hamsa hany Ezz Eldeen & Sameh said Daher, 2023. "Size-Threshold Effect in the Capital Structure–Firm Performance Nexus in the MENA Region: A Dynamic Panel Threshold Regression Model," Risks, MDPI, vol. 11(2), pages 1-13, January.
    14. Naveed Ahmed & Talat Afza, 2019. "Capital structure, competitive intensity and firm performance: evidence from Pakistan," Journal of Advances in Management Research, Emerald Group Publishing Limited, vol. 16(5), pages 796-813, June.
    15. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    16. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    17. Thi Ngoc Bui & Xuan Hung Nguyen & Kieu Trang Pham, 2023. "The Effect of Capital Structure on Firm Value: A Study of Companies Listed on the Vietnamese Stock Market," IJFS, MDPI, vol. 11(3), pages 1-20, August.
    18. Muhammad Riaz & Shu Jinghong & Muhammad Nadeem Akhtar, 2022. "Antecedents of capital structure and firm performance: evidence from G-7 countries," Journal of Money and Business, Emerald Group Publishing Limited, vol. 2(1), pages 29-42, February.
    19. Panagiota Papadimitri & Fotios Pasiouras & Menelaos Tasiou, 2021. "Financial leverage and performance: the case of financial technology firms," Applied Economics, Taylor & Francis Journals, vol. 53(44), pages 5103-5121, September.
    20. Elena Alexandra Nenu & Georgeta Vintilă & Ştefan Cristian Gherghina, 2018. "The Impact of Capital Structure on Risk and Firm Performance: Empirical Evidence for the Bucharest Stock Exchange Listed Companies," IJFS, MDPI, vol. 6(2), pages 1-29, April.
    21. Krivogorsky, Victoria & Joh, Gun-Ho & DeBoskey, D.G., 2018. "The influence of supply side factors on firm's borrowing decisions: European evidence," Global Finance Journal, Elsevier, vol. 35(C), pages 202-222.
    22. Adepoju Adeoba Asaolu, 2021. "Capital Structure and Firm Performance: A comparative Study of Oil & Gas and Manufacturing Sectors in the United States of America," Business and Management Studies, Redfame publishing, vol. 7(1), pages 29-44, March.
    23. Ajaya Kumar Panda & Swagatika Nanda, 2020. "Determinants of capital structure; a sector-level analysis for Indian manufacturing firms," International Journal of Productivity and Performance Management, Emerald Group Publishing Limited, vol. 69(5), pages 1033-1060, May.
    24. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    25. Thomas Dangl & Josef Zechner, 2021. "Debt Maturity and the Dynamics of Leverage [Rollover risk and market freezes]," The Review of Financial Studies, Society for Financial Studies, vol. 34(12), pages 5796-5840.
    26. Liang Zhang & Qi Yu & Zhenji Jin & Jian Xu, 2021. "Do Intellectual Capital Elements Spur Firm Performance? Evidence from the Textile and Apparel Industry in China," Mathematical Problems in Engineering, Hindawi, vol. 2021, pages 1-12, May.
    27. repec:eme:mfppss:mf-11-2019-0586 is not listed on IDEAS
    28. Abdelkader Derbali, 2022. "The influence of capital structure on firm profitability in USA and Bangladesh engineering industry," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-23, June.
    29. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    30. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-922, September.
    31. Naveed Ahmed & Talat Afza, 2019. "Capital structure, competitive intensity and firm performance: evidence from Pakistan," Journal of Advances in Management Research, Emerald Group Publishing Limited, vol. 16(5), pages 796-813, June.
    32. Ploypailin Kijkasiwat & Pongsutti Phuensane, 2020. "Innovation and Firm Performance: The Moderating and Mediating Roles of Firm Size and Small and Medium Enterprise Finance," JRFM, MDPI, vol. 13(5), pages 1-15, May.
    33. Ronald Ebenezer Essel, 2024. "The Effect of Capital Structure on Corporate Performance: Panel Empirical Evidence of an Emerging Capital Market," Journal of African Business, Taylor & Francis Journals, vol. 25(2), pages 224-263, April.
    34. Rami Zeitun & Mohamed Goaied, 2022. "The nexus between debt structure, firm performance, and the financial crisis: non-linear panel data evidence from Japan," Applied Economics, Taylor & Francis Journals, vol. 54(40), pages 4681-4699, August.
    35. Ryota Nakatani, 2023. "Does debt maturity influence productivity?," Economics Bulletin, AccessEcon, vol. 43(1), pages 116-136.
    36. Ganiyu, Olumuyiwa & Adelopo, Ismail & Rodionova, Yulia & Samuel, Olawale Luqmon, 2019. "Capital Structure and Firm Performance in Nigeria," African Journal of Economic Review, African Journal of Economic Review, vol. 7(01), January.
    37. Wang, Chih-Wei & Chiu, Wan-Chien, 2019. "Effect of short-term debt on default risk: Evidence from Pacific Basin countries," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    38. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    39. Evrim Hilal Kahya & Hüseyin Yiğit Ersen & Cumhur Ekinci & Oktay Taş & Koray D. Simsek, 2020. "Determinants of capital structure for firms in an Islamic equity index: comparing developed and developing countries," Journal of Capital Markets Studies, Emerald Group Publishing Limited, vol. 4(2), pages 167-191, November.
    40. Amanj Mohamed Ahmed & Deni Pandu Nugraha & István Hágen, 2023. "The Relationship between Capital Structure and Firm Performance: The Moderating Role of Agency Cost," Risks, MDPI, vol. 11(6), pages 1-17, June.
    41. Narinder Pal Singh & Mahima Bagga, 2019. "The Effect of Capital Structure on Profitability: An Empirical Panel Data Study," Jindal Journal of Business Research, , vol. 8(1), pages 65-77, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Khémiri, Wafa & Noubbigh, Hédi, 2020. "Size-threshold effect in debt-firm performance nexus in the sub-Saharan region: A Panel Smooth Transition Regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 335-344.
    2. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    3. Georgeta Vintilă & Ştefan Cristian Gherghina & Diana Alexandra Toader, 2019. "Exploring the Determinants of Financial Structure in the Technology Industry: Panel Data Evidence from the New York Stock Exchange Listed Companies," JRFM, MDPI, vol. 12(4), pages 1-16, October.
    4. Kanwal Iqbal Khan & Faisal Qadeer & Mário Nuno Mata & José Chavaglia Neto & Qurat ul An Sabir & Jéssica Nunes Martins & José António Filipe, 2021. "Core Predictors of Debt Specialization: A New Insight to Optimal Capital Structure," Mathematics, MDPI, vol. 9(9), pages 1-25, April.
    5. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2012. "Asymmetric capital structure adjustments: New evidence from dynamic panel threshold models," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 465-482.
    6. Berk YILDIZ, 2024. "Validity of Capital Structure Theories in the Shipping Industry: An Application on U.S. Equity Markets," Sosyoekonomi Journal, Sosyoekonomi Society, issue 32(60).
    7. Marcin Kedzior & Barbara Grabinska & Konrad Grabinski & Dorota Kedzior, 2020. "Capital Structure Choices in Technology Firms: Empirical Results from Polish Listed Companies," JRFM, MDPI, vol. 13(9), pages 1-20, September.
    8. Drobetz, Wolfgang & Pensa, Pascal & Wöhle, Claudia B., 2004. "Kapitalstrukturtheorie in Theorie und Praxis: Ergebnisse einer Fragebogenuntersuchung," Working papers 2004/09, Faculty of Business and Economics - University of Basel.
    9. Thi Hong Hoang & Călin Gurău & Amine Lahiani & Thuy-Luu Seran, 2018. "Do crises impact capital structure? A study of French micro-enterprises," Small Business Economics, Springer, vol. 50(1), pages 181-199, January.
    10. Rana El Bahsh & Ali Alattar & Aziz N. Yusuf, 2018. "Firm, Industry and Country Level Determinants of Capital Structure: Evidence from Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 175-190.
    11. Hong-Yi Chen & Cheng Few Lee & Tzu Tai, 2020. "The Joint Determinants of Capital Structure and Stock Rate of Return: A LISREL Model Approach," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 35, pages 1345-1397, World Scientific Publishing Co. Pte. Ltd..
    12. Biswajit Ghose, 2017. "Impact of Business Group Affiliation on Capital Structure Adjustment Speed: Evidence from Indian Manufacturing Sector," Emerging Economy Studies, International Management Institute, vol. 3(1), pages 54-67, May.
    13. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    14. Chen, Minjia & Matousek, Roman, 2020. "Do productive firms get external finance? Evidence from Chinese listed manufacturing firms," International Review of Financial Analysis, Elsevier, vol. 67(C).
    15. Anton Miglo, 2012. "Managers versus Students: New Approach in Improving Capital Structure Education," Journal of Education and Vocational Research, AMH International, vol. 3(11), pages 353-369.
    16. Ralf Sabiwalsky, 2010. "Nonlinear modelling of target leverage with latent determinant variables — new evidence on the trade‐off theory," Review of Financial Economics, John Wiley & Sons, vol. 19(4), pages 137-150, October.
    17. Miglo, Anton, 2021. "A New Capital Structure Theory: The Four-Factor Model," MPRA Paper 105102, University Library of Munich, Germany.
    18. Shoaib Ali & Attiya Yasmin Javid, 2015. "Relationship between Credit Rating, Capital Structure and Earning Management Behaviour: Evidence from Pakistani Listed Firms," PIDE-Working Papers 2015:121, Pakistan Institute of Development Economics.
    19. Hang, Markus & Geyer-Klingeberg, Jerome & Rathgeber, Andreas W. & Stöckl, Stefan, 2018. "Measurement matters—A meta-study of the determinants of corporate capital structure," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 211-225.
    20. Temimi, Akram & Zeitun, Rami & Mimouni, Karim, 2016. "How does the tax status of a country impact capital structure? Evidence from the GCC region," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 71-89.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:palcom:v:11:y:2024:i:1:d:10.1057_s41599-024-04211-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: https://www.nature.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.