The Arab Bank REVIEW Vol. 2, No. 2 October 2000 Capital Markets

Corporate Performance in Jordan: A Study of the Banking Sector By Muhsen Makhamreh*

I. CORPORATE PERFORMANCE IN JORDAN: A STUDY OF THE BANKING SECTOR

(1)

factors that might be concerned. Few studies have considered the relative importance of each factor in relation to the others in a multivariate form of analysis (Weiner and Mahoney,

Abstract

1980). For example, environmental influences on corporate

This study is aimed at determining and analyzing bank per-

performance may vary with organizational characteristics

formance in Jordan during the period 1989-1996. Four mod-

and leadership behavior; one leader may exploit an environ-

els have been selected to test and analyze that performance.

mental opportunity, while another leader may forgo such an

The findings have revealed that earnings per share (EPS),

opportunity or adapt slowly to it. The part played by leader-

stock prices and stock values are the better measures of

ship is probably of greater significance in smaller organiza-

banks’ performance. These measures are found to be affected

tions where the leader can exert more direct power and influ-

primarily by organizational variables and subsequently by

ence (Hall, 1977). Hall has also pointed out that while a

leadership variables. Environmental and managerial vari-

leader is important in times of organizational growth, devel-

ables are found to be insignificant. The study recommends

opment and crisis, for the most part organizations require

that banks should manage their total assets efficiently and

maintenance, and the corporate leader will therefore make

effectively in order to enhance their performance. Bank

little difference to their performance.

mergers to increase bank assets may be the right approach in that regard.

In Jordan, the subject of corporate performance has recently become a matter for anxiety and concern to decision- and

I. 1. Introduction

strategy-makers in the private and public sectors. Awareness

The subject of corporate performance has received significant

of this subject has been heightened in recent years owing to

attention from scholars in the various areas of business and

the economic indicators of the very low growth in gross

strategic management. It has also been the primary concern

domestic product, the high unemployment and the declining

of business practitioners (managers and entrepreneurs) in all

level of company profitability and share prices in the Amman

types of organizations because the outcome of corporate per-

Financial Market (Central Bank of Jordan Annual Report,

formance can be detrimental to an organization’s health,

1997).

profitability and, ultimately, its survival. High performance organizations are success stories because of their effective-

I. 2. Purpose

ness and efficiency in managing their operations, and their

The purpose of this study is to determine and analyze empir-

positive economic contributions to the well-being of the coun-

ically the factors that affect performance in Jordanian banks.

try and the individual, whereas low performance organiza-

The findings of the study may be used as guidelines in

tions are not, owing to their lack of such essential attributes.

advancing the relevant recommendations to help strategy makers engaged in strategy formulation and implementation

Researchers in the area of organizational performance have

to improve and enhance the performance of their banks.

identified various factors that influence corporate performance. Organizational, managerial, leadership and environmental factors have all been found to affect performance

II. CONCEPTUAL FRAMEWORK

(Weiner and Mahoney, 1981). The importance of the various factors that affect corporate

40

Most published research in this area has been limited in

performance has not been extensively researched. Only a few

scope. The studies in question have used a limited number of

studies have ventured to measure the relative importance of

variables related to a single factor only to explain the varia-

environmental, organizational and leadership influences on

tions in corporate performance with no reference to the other

performance at the same time (Lieberson and O’Connor,

1972; Weiner, 1978; Salancik and Pfeffer, 1977; Makhamreh,

In this study measures of profitability and stock variables are

The Arab Bank

1986). Surprisingly, these studies have reached similar find-

used as dependent variables. Profitability is a preferred meas-

REVIEW

ings. They have found that organizational factors have the

ure of relative performance because it assesses the efficiency

Vol. 2, No. 2

greatest impact on performance, that leadership factors have

with which plant, equipment, and current assets are trans-

a moderate impact on it, while environmental factors have

formed into profit. Profitability also permits a comparison to

the least effect.

be made of performance efficiency across corporate bodies of

October 2000 Capital Markets

vastly different size (Weiner and Mahoney, 1981). Moreover, The present study attempts to go beyond previous studies by

it provides feedback on how well a firm’s assets are being

including in the analysis more variables related to organiza-

properly utilized and transformed into profitability, thus rep-

tional leadership and environmental factors, as well as a new

resenting operating performance which provides an evalua-

managerial factor as a determinant of corporate perform-

tive referent and an indication of past and present organiza-

ance.

tional adaptation (Keats and Hitt, 1988).

II. 1. Measures of Corporate Performance

Table 1

Researchers in the strategic management field have offered a

Constructs and Variables Used to Measure Corporate

variety of models for analyzing corporate performance.

Performance

However, little consensus has emerged on what constitutes a valid set of performance criteria (Cameron, 1981; Lewin and Minton, 1986). For instance, researchers have suggested that

Construct Variable

Sales growth Average order size Sales per salesperson Sales per employee Composition of sales Inflation-adjusted return on sales After-tax return on total sales Ratio of sales to total assets Return on sales Sales per USD100 market value of stock Incidence of new product failures

studies on corporate performance should include multiple criteria analysis (Cameron, 1986; Hitt, 1988). This multidimensional view of performance implies that different models or patterns of relationships between corporate performance and its determinants will emerge to demonstrate the various sets of relationships between the dependent and the independent variables in the different models specified (Ostroff and Schmitt, 1993). Weiner and Mahoney (1981) have indicated that there are numerous measures of corporate performance that could

Sales Combined ratio

serve as dependent variables. However, more important than the specific measure chosen is the use made of multiple measures, because different criteria of performance are likely

Risk of combined ratio

to be differentially affected by the various independent variRisk adjusted for combined ratio

ables (Lieberson and O’Connor, 1972). Performance is a difficult concept, in terms of both definition and measurement. It has been defined as the end result of porate performance is considered to depend on the type of organization to be evaluated, and the objectives to be achieved through that evaluation (Hunger and Wheelen, 1997). Table 1 provides a summary of previous studies on performhave used measures related to sales, equity and investment, assets, margin and profit, market share and overall performance (Ketchen, Thomas and Snow, 1993).

Dess and Davis, 1984 Frazier and Howell, 1983 Frazier and Howell, 1983 Frazier and Howell, 1983 Frazier and Howell, 1983 Cool and Schendel, 1987 Robinson and Pearce, 1988 Lawless and Finch, 1989 Lewis and Thomas, 1990 Lawless and Finch, 1989 BeBondt, Sleuwaegen and Veugelers, 1988 Boeker, 1991 Fiegenbaum and Thomas, 1990 Fiegenbaum and Thomas, 1990 Fiegenbaum and Thomas, 1990

Equity and investment:

activity, and the appropriate measure selected to assess cor-

ance evaluation and performance measures. These studies

Representative Study

Sales:

Return on equity Return on net worth Return on investment Earnings per share Cash flow per share Dividend yields Return on capital employed Weighted index of growth in price/earnings ratio

Porter, 1973 Frazier and Howell, 1983 Lawless and Finch, 1989 Lawless and Finch, 1989 Lawless and Finch, 1989 Lawless and Finch, 1989 Lewis and Thomas, 1989

Return on assets Total asset turnover Operating income on assets

Dess and Davis, 1984 Frazier and Howell, 1983 Hatten and Hatten, 1985

Lewis and Thomas, 1990

Assets:

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The Arab Bank REVIEW

II. 2. Organizational Variables

Margin and profit:

Vol. 2, No. 2

Organizational variables such as size and technology have Price-cost margin Net profit before taxes Industry profit share Relative profit share Revenue per unit Profitability Pretax income per USD100 market value of stock Net income per USD100 market value of stock Average profit margin

October 2000 Capital Markets

Newman, 1973 Frazier and Howell, 1983 Hatten and Hatten, 1985 Hatten and Hatten, 1985 Trembly, 1985 Nath, 1988

been ascertained by researchers to have a significant impact

Lawless and Finch, 1989

effectively (Weiner and Mahoney, 1981). Moreover, the struc-

on performance (Woodward, 1965; Meyer, 1968; Aldrich, 1972; Thompson, 1967). Corporate size reflects the resources available to the firm, and these resources directly affect its economic activities and its ability to utilize the environment tural characteristics of large firms minimize the role that a

Lawless and Finch, 1989 Kumar, 1990

single individual plays in each one. For example, the impact on corporate performance of changing top management is

Market share: Market share Weighted market share

Nath, 1988 Fiegenbaum and Thomas, 1990 Weighted segment share Cool and Schendel, 1987 Risk of market share Fiegenbaum and Thomas, 1990 Risk of weighted market share Fiegenbaum and Thomas, 1990 Risk adjusted for market share Fiegenbaum and Thomas, 1990 Risk adjusted for weighted market share Fiegenbaum and Thomas, 1990 Overall:

less in large firms than in small ones (Kriesberg, 1962). Rumelt (1974) and Luffman and Reed (1982) have suggested that single-business firms often seek to diversify in order to grow and spread their risk across markets. As firms become larger they tend to increase their market share and enjoy economies of scale, thereby enhancing their efficiency and profit level (Bourgeois, 1980). As regards the issue of organizational size, there is mixed evidence in the management literature. Some writers have treated size as an imperative that dictates certain structural con-

Respondent rating of overall success Attractiveness for affiliation Occupancy rate

figurations, while others have focused on the relationship Hawes and Crittenden, 1984 Pegels and Sekar, 1989 Nath, 1988

Source: Ketchen, Thomas and Snow, 1993.

between size, strategy and performance (Keats and Hitt, 1988). Corporate size is expected to have a positive impact on performance measures. Larger firms have greater production capacity and should be able to generate greater sales; higher sales and efficient operations should both contribute to a

Two measures of profitability are used in this study: Return

strong positive relationship between profit and size (Weiner

on Investment (ROI) and Earnings Per Share (EPS). Return

and Mahoney, 1981). The size of a firm is measured in this

on Investment is the most commonly used measure of the

study by its total assets. Data for other measures are not avail-

profitability of corporate performance (Hunger and Wheelen,

able to all banks included in the study.

1997; Douglas and Craig, 1983; Buzzell and Gale, 1987). Technology is the combination of knowledge, equipment and

42

Stock prices and stock values are also used in this study as

methods of work used to transform resource inputs into orga-

dependent variables measuring corporate performance. Stock

nizational outputs (Schermerhorn, 1996). One important

prices and values assess the return to stockholders, and reflect

aspect of technology that influences organizational productiv-

an evaluation of performance relative to the expectations of

ity is the level of mechanization. Technological levels in terms

stockholders. In addition, stock prices influence the ability of

of the degree of mechanization achieved affect organizational

corporate management to raise capital from equity markets

output. A high degree of mechanized technology means a

(by issuing stock), and this represents a significant goal of cor-

higher level of capital investment, which in turn provides

porations (Weiner and Mahoney, 1981). Stock prices are indi-

opportunities for greater efficiency. Furthermore, the level of

cators of market performance; they provide a future-oriented

mechanization reflects differing corporate capabilities across

indication of an organization’s ability to transform itself in

firms, especially in the manufacturing sector (Aldrich, 1972).

the face of anticipated and unanticipated environmental chal-

Investment in capital assets per employee is expected to result

lenges, and thus offer a more long-run perspective (Keats and

in more efficient utilization of inputs to outputs, and ulti-

Hitt, 1988). Although these measures reflect different dimen-

mately to cost reduction and an increase in profitability.

sions of performance, research has shown them to be interre-

Technology is measured in this study by the capital-labor

lated (Keats and Hitt, 1988).

ratio.

II. 3. Leadership Variables

autonomy and enable it to act freely without being dependent

The Arab Bank

Leadership variables have been found to be influential in

on external sources for obtaining capital. Retained earnings

REVIEW

explaining corporate performance. Writers in the relevant lit-

strategy is expected to be positively related to profitability and

Vol. 2, No. 2

erature have focused on the individual in the leadership posi-

stock prices (Galbraith, 1967; Francis, 1972; Weiner and

tion, leader-member relations, the task structure of the lead-

Mahoney, 1981).

ership situation, the interaction between the leader and the

October 2000 Capital Markets

group and the decision-making power of the leaders (Fiedler,

The fact of corporate ownership is expected to influence the

1967; Robbins, 1999). Corporate leaders take decisions within

firm’s performance. Exercise of control by shareholders limits

the constraints placed upon them by organizational and envi-

managerial autonomy in making decisions, and vice versa. In

ronmental factors. For example, corporate leaders encounter-

this context shareholders control a firm when they own a larg-

ing the same external and internal constraints may very well

er percentage of its shares thereby being able to take decisions

take different decisions, and a change of leadership within a

that serve their own interests. On the other hand, if ownership

corporation may result in different corporate strategies (Child,

is divided among a large number of shareholders, this will

1972; Zaleznick, 1992). Two measures of leadership are uti-

limit their ability to influence decision-making at the firm

lized in this study: financial strategies and ownership.

level (Galbraith, 1967; Hunger and Wheelen, 1997). In this study, the number of shareholders in general, and the per-

Corporate strategy is defined as the direction and scope of an

centage of non-Jordanian shareholders, are used as measures

organization over the long term, which secures advantage for

of ownership.

that organization through the configuration and utilization of resources within a changing environment to achieve its objec-

II. 4. Environmental Variables

tives (Johnson and Scholes, 1999). In this context top deci-

The strategic management model suggests that an organiza-

sion-makers are expected to have a overall corporate perspec-

tion, through its strategy, selects and interprets its environ-

tive and, consequently, to become involved in organizational

ment, responds to those elements it considers to be fixed, and

strategies to acquire resources that will assist in furthering the

attempts to shape the remaining elements to its advantage

accomplishment of their objectives (Harvey, 1982; David,

(Bourgeois, 1980; Porter, 1980, 1985).

1997). Environmental variables affect corporate performance in varGordon (1945) has noted that the procurement of financial

ious degrees depending on the level of uncertainty associated

resources is primarily a function of top corporate leaders, and

with these factors. Levine and White (1961) and Johnson and

a firm’s ability to acquire such resources at market cost when

Scholes (1999) have pointed out that corporations develop a

needed influences its performance.

network of relationships with suppliers and customers in the domestic and global markets to cope with environmental

Capital can be obtained from external sources, i.e. by selling

uncertainty. There are many macroenvironmental influences

bonds and stocks, or by borrowing from internal sources in

that are important to an organization at different levels and

the form of retained earnings. A firm’s performance is affect-

periods of its existence, and capturing all of them is no easy

ed by its ability to acquire financial resources when needed

task (Johnson and Scholes, 1999).

and at reasonable cost. Two financial strategies are considered in this study, i.e. debt-to-equity ratio and retained earnings, as

However, macro measures have been identified that affect

representative of top management decisions.

corporate performance. Gross domestic product (GDP), the year concerned, industry sales and the industry concentration

A corporation’s debt-to-equity ratio represents the proportion

ratio have been used in previous research as measures of the

of financing obtained through debt in relation to equity. It

environmental forces that influence corporate performance

also impinges on the corporation’s ability to borrow and the

(Manu, 1992; Lieberson and O’Connor, 1972; Scherer, 1970;

cost of borrowing (Francis, 1972; Hunger and Wheelen, 1997).

Lekachman, 1971; Weiner and Mahoney, 1981).

Profitability is expected to be inversely related to the debt-toequity ratio, because increasing debt creates a fixed financial

The GDP measure is used in this study. It measures general

obligation on the firm in terms of interest payable.

economic activities and changes in the price level, and it captures the environmental factors surrounding the firm and

Retained earnings provide corporate management with

affecting its performance (Weiner and Mahoney, 1981). The

43

The Arab Bank REVIEW

other measures are not used in this study owing to the

Shareholding Companies Guide (JSCG)" published by the

absence of data.

Amman Financial Market (AFM). Shareholding companies

Vol. 2, No. 2 October 2000 Capital Markets

listed at the AFM are required to submit an annual statement II. 5. Managerial Variables

of categorized financial data, in addition to their annual

The managerial variables are related to the structure of the

report and balance sheets. Data related to the listed compa-

top management team and the board of directors, and their

nies are then compiled and published in the JSCG to provide

roles in influencing the performance of their firms. The cor-

performance results about Jordanian corporations for use by

porate form of business organization creates a separation of

the interested parties, i.e. researchers, decision makers, stock

ownership and control of assets. The board of directors, elect-

dealers, etc..

ed by shareholders, represents the owners’ interest, and thus has an obligation to approve all decisions that might affect

III. 2. The Sample

the long-run performance of the firm, and to oversee and eval-

Data for the years 1989-1996

uate the performance of the management team in running the

used in this study. Data relating to 14 banks are referred to for

firm’s affairs (Schellenger, Wood and Tashakori, 1989).

the same period. This time frame has been chosen in order to

(2)

published in the JSCG are

exclude the period before 1988, the year of economic crisis in However, boards of directors have traditionally played a pas-

Jordan when the Jordanian Dinar was devalued by approxi-

sive role in corporate governance and involvement in major

mately 50 percent and Jordan was placed by the International

corporate decisions (Mace, 1971; Drucker, 1954). Scholars in

Monetary Fund and the World Bank under an economic cor-

the field have offered guidelines and suggestions for improv-

rectional program which is still in place.

ing board involvement and effectiveness. Most of these guidelines are related to the composition of the board of directors

III. 3. Models Specification

among insiders, from the top management team, and out-

To identify variables that affect bank performance in Jordan

siders, representing shareholders from outside the corpora-

four models have been developed to test the proposed

tion. Proponents of having an outsider majority on the board

hypotheses. Four measures of performance are used as

of directors have argued that outsiders provide a breadth of

dependent variables in these models, namely:

knowledge and experience as well as independence from corporate management (Vance, 1983; Palmieri, 1979; Geneen,

Y 1:

income after taxes to total assets.

1984). On the other hand, opponents of outsiders as board members have accused them of frequently lacking sufficient

Y 2:

Y 3:

and Wheelen, 1997; Finkelstein, 1992). The composition of the board of directors in Jordanian cor-

Earnings per share (EPS), which are calculated as net income after taxes to the number of subscribed shares.

knowledge, involvement and enthusiasm to contribute adequately to providing guidance to top management (Hunger

The return on investment (ROI),(3) calculated as net

Stock prices, which are the closing prices of the stocks at the end of the year.

Y 4:

Stock value (market capitalization).

porations consists of outside individuals and outside companies representing shareholders’ interests, in addition to the

Nine variables have been identified as independent variables

general manager of the corporation who may be a member of

representing the organizational, leadership, environmental

the board (Amman Financial Market, 1996).

and managerial factors. These are: X 1:

Firm’s total assets in million JDs.

X 2:

Debt/equity ratio.

the total board membership; and, secondly, whether the gen-

X 3:

Gross domestic product (GDP) in million JDs.

eral manager of the corporation is a board member or not.

X 4:

Number of shareholders.

X 5:

Percentage of foreign ownership (non-Jordanian) in

In this study, two measures of board composition will be used: first, the ratio of board members representing companies to

Jordanian firms.

III. METHODOLOGY X 6:

44

Ratio of outside companies represented on the board of

III. 1. Database

directors of the firm to total representations on the

Data for this study have been obtained from the “Jordanian

board.

X 7:

Capital/labor ratio.

X 8:

Retained earnings in million JDs.

X 9:

Dummy variable to measure whether the general manager of the firm is on the board of directors or not.

110 observations, representing time series and cross-section-

The Arab Bank

al data, have been used in the statistical analysis. Table 2 pro-

REVIEW

vides the descriptive statistics of all variables, while table 3

Vol. 2, No. 2

shows the stepwise multiple regression results for each model.

October 2000 Capital

The nine independent variables have been tested in each of

IV. 2. Model 1: Estimation and Analysis

Markets

Table 3 presents the statistical outcome of this model.

the four models as follows:

Stepwise multiple regression analysis is used to test the relaModel 1: Y1 = F (X1, X2, X3, X4, X5, X6, X7, X8, X9)

tionship between ROI as the dependent variable and the nine

Model 2: Y2 = F (X1, X2, X3, X4, X5, X6, X7, X8, X9)

independent variables.

Model 3: Y3 = F (X1, X2, X3, X4, X5, X6, X7, X8, X9) In this model, technology measured by the capital-labor ratio

Model 4: Y4 = F (X1, X2, X3, X4, X5, X6, X7, X8, X9)

is found to be the most significant variable affecting ROI in the banking sector. The higher the level of mechanization in IV. FINDINGS OF THE STUDY

the banks, the higher the ROI. Banks in Jordan had a high level of mechanization in terms of hardware and software.

IV. 1. Estimation and Analysis of the Models

This led to a higher level of operational efficiency and ulti-

A stepwise multiple regression analysis has been used to esti-

mately profitability. Retained earnings came second in their

mate the coefficients and the direction of relationships

influence on ROI. Both variables can explain only 17 percent

between the dependent and the independent variables in

of the variance in ROI (see table 3). The other variables in the

each of the four models specified in this study. A total pool of

model are found to be insignificant.

Table 2 Means, Standard Deviations and Person Correlation Matrix Variable

Mean

SD

X1

805

1997

1.00

X2: Debt/Equity Ratio

42.78

50.64

0.86**

X3: Gross Domestic Product

3533

824

0.09

-0.07

1.00

X4: Number of Shareholders

X1: Total Assets

X2

X3

X4

X5

X6

X7

X8

X9

Y1

Y2

Y3

Y4

1.00

5991

8029

-0.09

-0.20

0.10

X5: Percentage of Foreign Ownership in Jordanian Corporations

1.00

2.93

6.21

-0.08

-0.13

0.03 -0.05

X6: Percentage of Companies on the Board of Directors

0.21

0.22

-0.25** -0.19 -0.39**

0.16

0.01 -0.24* 0.10 0.28** -0.44** 1.00

1.00

0.06 -0.04 -0.06 1.00

0.03

0.03

-0.23*

X8: Retained Earnings

-0.60

4.06

0.07

0.15

X9: Dummy Variable a

0.29

0.46

-0.12

-0.09

0.01

Y1: Return on investment

0.72

0.60

0.04

-0.09

0.15 -0.10

Y2: Earnings per share

1.33

3.93

0.98*

0.85** 0.07 -0.11 -0.09 -0.24* -0.20* 0.06 -0.11 0.07 1.00

18.20

51.50

0.96**

0.89** 0.02 -0.11 -0.10 -0.24* -0.21* 0.05 -0.11 0.03 0.97** 1.00

79.20 196.30

0.98**

0.81** 0.02 -0.08 -0.07 -0.24* -0.20* 0.06 -0.11 0.07 0.98** 0.95** 1.00

X7: Capital/Labor Ratio

Y3:

Stock price

Y4: Stock value * a < 0.01

0.04

0.03 -0.38** 1.00

0.17 -0.20* 0.09 0.15 -0.17

-0.08

0.07 1.00

0.34

0.05 0.04 1.00

**a < 0.001

45

The Arab Bank REVIEW Vol. 2, No. 2 October 2000

Table 3 Variables Affecting Corporate Performance in the Banking Sector in Jordan Variables Entered in a Stepwise Regression Analysis Model Variable

Capital Markets

X1: Total Assets X2: Debt/Equity Ratio X3: Gross Domestic Product X4: Number of Shareholders X5: Percentage of Foreign Ownership in Jordanian Corporations X6: Percentage of Companies on the Board of Directors X7: Capital/Labor Ratio X8: Retained Earnings X9: Dummy Variable a Multiple R R2 Adjusted R2 F-Statistics N

Model 1 Beta Step Entered 0.13 0.06 0.08 -0.05

Model 2 Beta Step Entered 0.98 1 0.03 -0.02 -0.03

Model 3 Beta Step Entered 0.68** 1 0.34** 2 -0.04 -0.01

Model 4 Beta Step Entered 1.08** 1 -0.11** 2 0.42** 3 -0.01

-0.02

-0.02

-0.04

0.01 0.03 -0.01 0.01 0.99 0.97 0.97 4120.90** 110.00

0.02 0.08 -0.01 0.02 0.97 0.94 0.94 641.50** 110.00

0.12 -0.08 0.45** 0.25* 0.06 0.41 0.17 0.15 10.69** 110.00

1 2

3

0.02 0.01 0.01 -0.01 0.99 0.98 0.97 1529.80** 110.00

a Whether the General Manager is a board member or not (Yes=0, No=1) * α < 0.01

**α < 0.001

IV. 3. Model 2: Estimation and Analysis

the two largest banks in Jordan, the Arab Bank and the

Table 3 presents the statistical outcome of the analysis of this

Housing Bank, in terms of total assets, had the highest stock

model. Stepwise multiple regression analysis is used to test

market prices in 1996 (JSCG, 1997). Debt/equity ratio and

the relationship between earnings per share (EPS) as a

capital/labor ratio are seen to influence stock prices, but at a

dependent variable and the nine independent variables in

very low level. The other independent variables are found to

each of the four sectors.

be insignificant in affecting stock prices. This result also lends support to that of Model 2, and the importance of total assets

In this model, EPS is found to be affected by only one orga-

for performance, and, ultimately, the impact of mergers on

nizational variable. Total assets are found to explain 97 per-

total bank performance.

cent of the variance of EPS (R = 0.97). The larger the assets, 2

the higher the EPS. This means that larger banks have more

IV. 5. Model 4: Estimation and Analysis

EPS than small banks. The EPS for the Arab Bank and the

Table 3 presents the statistical outcome of Model 4. Stepwise

Housing Bank, the two largest banks in Jordan, were JD 21.7

multiple regression analysis is used to test stock value as a

and 0.34 in 1996 respectively, while total assets were 10 bil-

dependent variable together with the nine independent vari-

lion and 1 billion JD respectively (JSCG, 1997). This also

ables in the four sectors.

demonstrates that a future bank merger to constitute a critical mass of bank assets may well reflect positively on the

In this model, total assets are found to be the major determi-

banks’ performance as demonstrated by their EPS.

nant of stock value. This variable is found to explain 97 percent (R2 = 0.97) of the change in stock value. Debt/equity ratio

IV. 4. Model 3: Estimation and Analysis

came second in its impact, but at a low level (see table 3). The

The statistical evidence of testing Model 3 is also shown in

other independent variables are found to be insignificant.

table 3. Stepwise multiple regression analysis is used to test the relationships between stock prices as a dependent variable

Analysis of the factors that affect corporate performance in

and the nine independent variables.

banks revealed varied results for each model. To sum up the outcome of the analysis, Models 2,3 and 4 are revealed as bet-

46

In this model, stock prices are found to be basically affected

ter predictors of performance in the bank sector than Model

by an organizational variable. Total assets are found to be sig-

1. This conclusion is based on the explanatory power of these

nificantly affecting stock prices, and able to explain 92 per-

models in terms of their R2, which is 0.97, 0.94 and 0.98 for

cent (R2 = 0.92) of their variance; the larger a bank’s assets,

each model respectively, as shown in table 3. Moreover, total

the higher its stock market price, and vice versa. Once again,

assets appear to be the most influential single variable in

determining performance in these three models. That means

their imputation of that failure to the general economic con-

The Arab Bank

that corporate performance in the bank sector is mainly

ditions prevailing in the country is no longer valid. Even in

REVIEW

determined by the effective and efficient utilization of the

recessionary conditions, successful managerial leadership

Vol. 2, No. 2

banks’ assets.

excels in guiding banks in turbulent times, and endeavours to save the banks by utilizing an innovative approach. Their failure cannot and should not be explained away by the slow

V. CONCLUSION AND RECOMMENDATIONS

October 2000 Capital Markets

economic conditions prevailing in the country. In the interests of future success in strategic competitiveness and positioning

Corporate performance is of major concern to policy makers

therefore, Jordanian banks should be led by capable man-

in business organizations and to the Government in Jordan

agers, including top management and the board of directors,

owing to its role in the country’s future competitive position

whose cooperation is essential and decisive in creating a pio-

and strategic location in the global economy.

neering and visionary strategic management in the banking corporations in Jordan. A successful form of this corporate

This role has an added significance in view of the need to

governance is bound to lead to a better performance and ulti-

meet the expected pressure on Jordanian firms to enhance

mately to the success of the banks.

and improve their performance after Jordan signed the European Partnership Agreement and acceded to the World Trade Organization. This pressure on Jordanian corporations

VI. NOTES

to put their house in order and improve their performance is

1. This is part of a comprehensive study on corporate performance in

essential nowadays, as Jordan is aspiring to be a regional cen-

Jordan, which will be published by "Dirasat Research Journal" of

ter of attraction to foreign investment and information tech-

the University of Jordan, volume 28, No. 1, 2001.

nology.

2. The latest issue of the JSCG was published in 1997 and contained data up to and including the year 1996.

The present study has aimed at determining and analysing corporate performance in Jordanian banks. Data have been

3. Data used for each variable, as calculated and presented in the JSCG.

collected from the JSCG on 14 banks during the period 198996. A total pool (cross-sectional and time data) of 110 observations has been used in the analysis. Four models were chosen to test and analyze corporate performance in Jordan at the macro, sectoral and annual levels. In the banking sector, earnings per share, stock prices and stock values are found to be a better measure of a bank’s performance than ROI. On the other hand, organizational variables appear to be the most significant independent variables in influencing a bank’s performance, followed by leadership variables with low significance. Environmental variables and managerial variables are found to have no significance at all.

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48

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* Muhsen

Makhamreh,

Ph.D.,

is

a

Professor

of

Business

Management at the Faculty of Business Administration, University of Jordan, Amman.