The Impact of Firm's Size, and Firm's Debts Level on the Debt and Profitability Relationship of the Industrial Listed Companies in the Palestine Securities Exchange

Abstract

This paper aims to examine the impact of the debts on the accounting performance of the listed industrial companies in the Palestine Exchange; PEX and this is the first objective. The second objective aims to examine the influence of the firm's contextual factors (firm's size and firm's debts level) on the debt-performance relationship. The influence of the contextual factors is examined by classifying the data into two portfolios according to the firm's size and firm's debts level. In order to achieve the previous objectives, this paper has a sample of the accounting information that is taken from the industrial listed firms in the PEX for the period 2005-2012. This study employs a number of statistical tests (descriptive statistics, Pearson's correlation, the ordinary least squares, and pairwise Granger causality tests). Besides, 11 industrial listed Palestinian corporations were selected to examine the hypotheses [88 firm-year]. The findings of this paper state that the industrial listed corporations in the PEX rely on the equity financing where 75% represents equity financing. Furthermore, the debts financing enhances the profitability of the industrial listed firms in the PEX where there is a positive impact of debts on the performance. The second result shows that there is a positive impact of the debts on the profitability for both low size firms and high size firms while high size firms can exploit their debts in a feasible way better than the low size firms. The third conclusion shows that the debts have no role in explaining the profitability for the low debts level firms. Additionally, there is a positive influence of the debts on the financial performance for high debts level firms. The aforementioned result comes with a rule. The rule states that the high debts level firms have opportunity to maximize the wealth more than the low debts level firms. At last but not least, this paper recommends the stakeholders in Palestine to consider the debts for interpreting the profitability. It highly recommends the PEX to allow the listed corporations to issue restricted number of bonds.