Capital Structure and Market Power: Evidence from Jordanian Banks

This paper provides new insights into the way in which the capital structure and market power and capital structure and profitability are related. We used sample data of fourteen banks listed on the Amman Stock Exchange for the period from 2005 to 2008. We examine the de-pendent variable, which are expressed by total debt deflated by total assets, while the independent variables are TobinQ, Growth, Profitabil-ity, Size, Ownership, Risk and Tangibility ratio. The ols estimation re-sults indicate that, at lower and higher ranges of Tobin’s Q, banks em-ploy higher debt, and reduce their debt at intermediate range. This is due to the complex interaction of market conditions, agency costs, and bankruptcy costs. We also show the saucer-shaped relation between capital structure and profitability because of the interplay of agency costs, costs of external financing and interest tax-shield. We find that size tangibility variables have a positive influence both on capital struc-ture and on the other hand on growth, while risk and ownership vari-ables have a negative influence on capital structure. Key Words: knowledge, competitiveness, firm performance, knowledge-based theory jel Classification: g30, g21, g2