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Arab Journal of Administration المجلة العربية للإدارة

Abstract

This study aims to investigate the effect of investment opportunities on capital structure for the industrial companies listed in Amman Stock Exchange over the period (2001-2009). The study uses three proxies of investment opportunities, the market to book ratio, the ratio of operating cash flows to fixed assets, the growth in fixed assets ratio. Our methodology is based on using multivariate regression analysis in which debt ratio is used as a dependent variable while one proxy of investment opportunities is used as independent variable in addition to some control variables each time the regression is estimated. Using a sample of 46 companies, the results indicate a statistically significant negative effect of operating cash flows to fixed assets ratio on the debt ratio.Thus, the Jordanian industrial companies use less amounts of debt to finance the new investment opportunities. This may be explained by its high probability of bankruptcy risk. Alternatively, they use equity financing and specifically, the retained earnings as it is the lowest cost source of financing.

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