Impact of Size and Type of Target Deviation of Capital Structure on the Investment Decisions of Jordanian Firms: Panel Data Analysis

Abstract

This study aims at investigating the impact of size and type of target deviation of capital structure on firms’ investment decisions. To accomplish this objective, the study uses cross-sectional time series data for a sample of 47 industrial firms listed in Amman Stock Exchange over the period (2000-2015). Using panel data analysis, which is usually estimated by either fixed effect model or random effect model, the study found that investment decisions of Jordanian industrial firms are positively affected by positive target deviation and negatively affected by negative target deviation. This effect gradually declines as the target deviation of capital structure becomes close to its target level of capital structure. This finding suggests that the financing decisions of Jordanian listed firms are largely affected by the risk of bankruptcy agency problems and information asymmetries, which confirms that capital market frictions are relevant and influence a firm’s investment and financing decisions. Based on these findings and conclusions, the study recommends Jordanian companies to keep a reasonable level of financial leverage in order to maintain their borrowing capacity and enhance their financial flexibility to avoid the risk of losing their valuable investment opportunities in the future. Moreover, the study recommends the government to develop the capital market and create a well developed bond market.