Relationship between Financial Performance and Systematic Risk: Case Study on Jordan Commercial Banks Listed in Amman Stock Exchange

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2 Relationship between Financial Performance and Systematic Risk: Case Study on Jordan Commercial Banks Listed in Amman Stock Exchange Abstract The objective of the study is to examine the relationship which might exist between the financial performance and the systematic risks of the commercial banks stock traded at Amman Stock Exchange (ASE). Six performance indicators are used; profitability, leverage, liquidity, capital adequacy, assets quality and revenue quality. Systematic risk measured by Beta for eleven commercial banks listed at ASE over the period: January 2000 to December The study indicates that three financial performance measures are having a significant effect on the systematic risks of the commercial banks stocks traded at ASE. Capital adequacy is having a positive effect, while, both asset and revenue qualities are having a negative effect on the systematic risks of the stock prices. The model was able to explain 80% of the systematic risks vitality of the stock prices.

3 (Capital Market Theory( (Capital Asset Pricing Model( β

4

5 H 01 H 02 H 03 H 04 H 05 H 06 H

6 .3 (Hamada) (Hamada) (Bowman) (Beaver, Kettler & Scholes) (Logue & Merville) (Jahankhani & Lynge) (Zangeneh & Zitz)

7 )Abdullah) (Omet) )Erol & El-Bdour) )Shamia & Talafha) )Suwaidan & El-Khouri)

8 0222

9 (Market (β( (Sharp) Model) R t = α + β Rm t + e t t Holding Period Return (HPR) R t (p t-1 ) HPR = (Pt t Pt-1) Pt-1 (Omet & Al-Debi'e) (Div) + Div (p t ) Rm t )t = 1,, 84( t α β (β i ( e t β it = β 2 i σ 2 t (Rm) t i i β it β 2 i t (β i ( :σ 2 t (Rm)

10 Market Risk Model: β it = α + b 1 PROF t + b 2 LEV t + b 3 LIQ t + b 4 ADEQ t + b 5 AQUL t + b 6 RQUL t + e it t i (Profitability) (Financial Leverage) (Liquidity) (Capital Adequacy) β it PROF t LEV t LIQ t ADEQ t (Assets Quality) AQUL t (Revenue Quality) RQUL t (PROF) 11.5

11 (LEV) 88.7 :( LIQ) (ADEQ) (AQUL) 13.5

12 (RQUL) 76 )β) (β)

13 )ADEQ( )ADEQ( )LEV( (LIQ( (Greene) (Serial (Auto Correlation) (Residuals) )Multicolinearity) Correlation) (D-W) (Gujarati) )Auto Regressive AR(1)( (lag( AR(1)

14 (Multicolinearity) (D-W) (D-W) F (LEV).)ADEQ( F (LIQ) )ADEQ( F (ADEQ) (LIQ) (LEV) (LIQ) (LEV) F (RQUL) (AQUL) t (ADEQ).(β it )

15 (P-value) F Adjusted R 2 )D-W( )D-W( (PROF).)β it ( t β it = ADEQ t AQUL t RQUL t ( ) (3.6805) ( ) ( ) = (R 2 ) = = (Adjusted R 2 ) (S.E. of regression) 1129 = )D-W( (F=66) 2 =(P-Value) F

16 F t Adjusted R 2 )D-W( )D-W( H 01 F H 02

17 t H 03 t H 04 t H 05 t H 06 t H 07

18 t

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20 (1) Robert Hamada, Portfolio Analysis, Market Equilibrium and Corporate Finance, Journal of Finance, V.24, No.1, 1969, PP (2), The Effect of the Firm s Capital Structure on the Systematic Risk of Common Stock, Journal of Finance, V.27, No.2, 1972, PP (3) R.G. Bowman, The Theoretical Relationship between Systematic Risk and Financial (Accounting) Variables", Journal of Finance, V.34, No.3, 1979, PP (4) William Beaver, Paul Kettler, and Myron Scholes, The association between market determine and accounting determined risk measures, Accounting Review, V.45, No.45, 1970, PP (5) Dennis Logue, and Larry Merville, Financial policy and market expectations, Financial Management, V.1, No.2, 1972, PP (6) A. Jahankhani, and M. Lynge, Commercial banks financial policies and their impact on market-determined measures of risk, Journal of Bank Research, Vol. II, 1980, PP (7) Mansur Zangeneh, and Mark Zitz, The Association between Banks' Performance Ratio and market-determined measures of Risk, Applied Economic, V. 25, No.12, 1993, PP (8) Abdulkader Abdullah, The Relationship between Commercial banks' Performance and Risk Measures: A Case of Saudi Arabia Stock Market, Humanities and Management Sciences Journal, Vol.4, No.2, 2003, PP (9) Ghassan Omet, The Behavior of Systematic Risk in the Securities Exchange (Amman Bourse) and Muskat Securities Market, Dirasat, Vol.28, Issue 1, 2001, PP (10) C. Erol and R. El-Bdour, An Empirical Investigation of Risk of Stocks Traded on the Less Developed Capital Market: Jordan as a case Study, Abhath Al-Yarmouk, Vol. 6, No. 3, 1990, PP (11) Abdalla Shamia and Hussain Talafha, Amman Financial Market Stability, Effectiveness, and Efficiency: An Economic Analysis, Abhath AL-Yarmouk, Vol.6, No.2, 1990, PP )10( )13( )11(

21 )11( (16) Mishiel Suwaidan, & Ritab El-Khouri, An Empirical Examination of the Relationship Between Increased Disclosure in Jordanian Industrial Corporate Annual Reports and Risk, Dirasat, Vol.27, Issue 2, 2000, PP )17( )18( )19( )02( )01( )00( )03( )01( (25) William Sharpe, Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, V.19, No.3, 1964, PP (26) Ghassan Omet, and Mamoun Al-Debi'e, The Association between Systematic Risk and Debt-to-Equity Ratio in Amman Financial Market, Dirasat, Vol.27, No. 2, 2000, PP )07( (28) William Greene, Econometric Analysis, 4 th Ed., (Prentice-Hall: NJ, USA, 1998(. (29) Damodar Gujarati, Basic Econometrics, 3rd Ed., (Mc. Graw-Hill Book Company: USA, 1995).

22 RQUL AQUL ADEQ LIQ LEV PROF

23 (β) PROF LEV LIQ ADEQ AQUL RQUL PROF LEV LIQ ADEQ AQUL RQUL

24 Variable Coefficient Std. Error t-statistic P-value C PROF ADEQ AQUL RQUL AR(1) R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression F-statistic Sum squared resid P-value Durbin-Watson stat