Effect of the Capital Structure of Corporations Listed at Amman Stock Exchange on the Systematic Risks of their Stocks

Osama A. Salam

Abstract


This study aims to investigate the effect of the capital structure of corporations on the systematic risks of their stocks. Its aim was achieved by applying this capital structure on a sample of industrial corporations listed at Amman Stock Exchange (ASE), during the period 1/1/1996-31/12/2003. After analyzing and examining the data from this sample, the researcher found that there was a significant effect of corporation's capital structure, as measured by the corporation’s average debt ratio, on the corporation's systematic risks, as measured by beta coefficient of its stock. So, the study suggests a model that relates corporation's capital structures to beta coefficient of its stock. Beta coefficient can be used to determine the required rate of return by investor according to Capital Asset Pricing Model (CAPM). The required rate of return by investor can then be used to discount the expected cash flows of the corporation's stock; that is, to discount the expected Earning Per Share (EPS) of corporation, so as to estimate the fair value of its stock. The corporation management, then, can differentiate between the alternative capital structures and choose the one that leads to the highest fair value of the stock.


Keywords


Capital Structure, Average Debt Ratio, Systematic Risk, Beta Coefficient.

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