Determinants of Financial Structure and their Impact on Banking Performance
Abstract
Purpose: The study aims to understand Iraqi commercial banks' behavior toward their financial structures and evaluate their performance using the standard equation method and the Panel Data method.
Theoretical framework: An increase in financial leverage leads to an increase in the required rate of return on equity due to the high risk faced by shareholders, is concluded in a theory of corporate finance. There are internal and external determinants that affect the financial structure of a bank and their performance as well. External determinants include taxation policy, inflation rates, and the situation of financial markets while internal determinants include bank size, asset structure and growth rate. However, Iraqi banking sector witnessed major changes due to the openness and reconsidering the existing regulations and laws and dealing with the data of globalization era.
Design/methodology/approach: The approach of this research is to find the banking performance of Iraqi banks by incorporating the size of bank, the structure of bank’s assets and growth of banks as determinants and return on assets (ROA) is taken as an indicator of banking performance. Multiple regression was applied using the Panel Data method to test the ability of the independent variables in explaining and understanding the dependent variable.The study, which was applied on 13 Iraqi commercial banks registered in the Iraq Stock Exchange during the period 2007-2021.
Findings: The results of the study shows that the size of the bank, the structure of the bank’s assets, and the bank’s growth are the determinants that have a significant impact on the banking performance represented by the return on assets (ROA). The major impact on the banking performance is the structure of the assets of the Iraqi banks because they keep their money within these assets, which affects the banking performance. The standard equation proved that the other effect is the growth rate of the banks. Finally, the size of the bank is shown to have the least impact on the evaluation of banking performance.
Research, Practical & Social implications: The contribution of this research study demonstrated that using ROA (return on assets) could become helpful in analyzing effectively significant impact of size, structure and growth of banks. Balanced financial structure works more accurately by providing proper support to the managerial level.
Originality/value: To date, and to the best of the knowledge of researchers, most of the previous research studies have focused the impact of capital structure towards performances of banking sector in Iraq, but this study investigates the determinants of financial structure and their impact on banks’ performance in Iraq.
References
2. Anarfo, E. B. (2015). Determinants of capital structure of banks: Evidence from Sub-Sahara Africa. Asian Economic and Financial Review, 5(4), 624-640.
3. Ang, J. S., & Jung, M. (1993). An alternate test of Myers' pecking order theory of capital structure: the case of South Korean firms. Pacific-Basin Finance Journal, 1(1), 31-46.
4. Aremu, M. A., Ekpo, I. C., Mustapha, A. M., & Adedoyin, S. I. (2013). Determinants of capital structure in Nigerian banking sector. International Journal of Academic Research in Economics and Management Sciences, 2(4), 27.
5. Bradley, M., Jarrell, G. A., & Kim, E. H. (1984). On the existence of an optimal capital structure: Theory and evidence. The journal of Finance, 39(3), 857-878.
6. Bradley, M., Jarrell, G. A., & Kim, E. H. (1984). On the existence of an optimal capital structure: Theory and evidence. The journal of Finance, 39(3), 857-878.
7. Chang, C. (1999). Capital structure as optimal contracts. The North American Journal of Economics and Finance, 10(2), 363-385.
8. Chaplinsky, S., & Niehaus, G. (1990). The determinants of inside ownership and leverage. Ann Arbor, University of Michigan, Working Paper.
9. Diamond, J. (1989). A note on the public choice approach to the growth in government expenditure. Public Finance Quarterly, 17(4), 445-461.
10. Giner, B., & Reverte, C. (2001). Valuation implications of capital structure: a contextual approach. European Accounting Review, 10(2), 291-314.
11. Hall, G. C., Hutchinson, P. J., & Michaelas, N. (2004). Determinants of the capital structures of European SMEs. Journal of Business Finance & Accounting, 31(5‐6), 711-728.
12. Harris, M., & Raviv, A. (1990). Capital structure and the informational role of debt. The journal of finance, 45(2), 321-349.
13. Harris, M., & Raviv, A. (1991). The theory of capital structure. the Journal of Finance, 46(1), 297-355.
14. Heshmati, A. (2001). The dynamics of capital structure: Evidence from Swedish micro and small firms (No. 0440). Stockholm School of Economics.
15. Ibrahim, S.S., 2019. The Impacts of Capital Structure on Bank Performance: A Case of Iraqi Private Banks. Koya University Journal of Humanities and Social Sciences, 2(1), pp.118-123.
16. Jadah, H.M., Hasan, M.F. and Al-Husainy, N.H.M., 2021. Dynamic panel data analysis of capital structure determinants: Evidence from Iraqi banks. Journal of Business Strategy, Finance and Management, 2, pp.102-114.
17. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.
18. Jensen, M. C., & Meckling, W. H. (2019). Theory of the firm: Managerial behavior, agency costs and ownership structure. In Corporate Governance (pp. 77-132). Gower.
19. Kamran, H. W., Khan, M. U., & Sharif, S. (2016). Capital structure determinants: evidence from banking sector of Pakistan. Research Journal of Finance and Accounting, 5(19), 59-66.
20. Kim, W. S., & Sorensen, E. H. (1986). Evidence on the impact of the agency costs of debt on corporate debt policy. Journal of Financial and quantitative analysis, 21(2), 131-144.
21. Kraus, A., & Litzenberger, R. H. (1973). A state-preference model of optimal financial leverage. The journal of finance, 28(4), 911-922.
22. Lawal, A. I. (2014). Capital structure and the value of the firm: evidence from the Nigeria banking industry. Journal of Accounting and Management, 4(1).
23. Michael, C. J., & William, H. M. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.
24. Michael, C. J., & William, H. M. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.
25. Michaelas, N., Chittenden, F., & Poutziouris, P. (1999). Financial policy and capital structure choice in UK SMEs: Empirical evidence from company panel data. Small business economics, 12(2), 113-130.
26. Miller, M. H. (1977). Debt and taxes. the Journal of Finance, 32(2), 261-275.
27. Miller, M. H. (1988). The Modigliani-Miller propositions after thirty years. Journal of Economic perspectives, 2(4), 99-120.
28. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 48(3), 261-297.
29. Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American economic review, 53(3), 433-443.
30. Myers, S. C. (1977). Determinants of corporate borrowing. Journal of financial economics, 5(2), 147-175.
31. Myers, S. C. (1984). Capital structure puzzle.
32. Octavia, M., & Brown, R. (2010). Determinants of bank capital structure in developing countries: regulatory capital requirement versus the standard determinants of capital structure. Journal of Emerging markets, 15(1), 50.
33. Ooi, J. (1999). The determinants of capital structure evidence on UK property companies. Journal of Property Investment & Finance.
34. Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks’ profitability: evidence from EU 27 banking systems. Procedia economics and finance, 20, 518-524.
35. Pinches, G. E., & Mingo, K. A. (1973). A multivariate analysis of industrial bond ratings. The journal of Finance, 28(1), 1-18.
36. Remmers, L., Stonehill, A., Wright, R., & Beekhuisen, T. (1974). Industry and size as debt ratio determinants in manufacturing internationally. Financial Management, 24-32.
37. Scott, J. H. (1977). Bankruptcy, secured debt, and optimal capital structure. The journal of finance, 32(1), 1-19.
38. Senaratne, S. (1998). Pecking order of financing: Empirical evidence in the Sri Lankan capital market. Sri Lankan Journal of Management, 3(1), 35-51.
39. Shaalan, T. What Explains the Financing Behavior of Commercial Banks Listed on the Kuwait Stock Exchange: The Pecking Order Theory or Trading Off Theory.
40. Sinha, S. (1992). Inter-industry variation in capital structure in India. Indian Journal of Finance and Research, 2(2), 13-26.
41. Smith, C. W., & Warner, J. B. (1979). Bankruptcy, secured debt, and optimal capital structure: Comment. The Journal of Finance, 34(1), 247-251.
42. Storey, D. J. (1994). The role of legal status in influencing bank financing and new firm growth. Applied economics, 26(2), 129-136.
43. Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of financial Economics, 26(1), 3-27.
44. Tarazi, R. E. (2013, May). Determinants of capital structure: evidence from Thailand panel data. In Proceedings of 3rd Global Accounting, Finance and Economics Conference (No. 1958, pp. 1-9).
45. Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of finance, 43(1), 1-19.
46. Uralov, S. (2020). The Determinants of Bank Profitability: A Case of Central European Countries. Management, 8(3), 08-16.
47. Williamson, O. E. (1988). Corporate finance and corporate governance. The journal of finance, 43(3), 567-591.
2.png)
