Research studies

The Effect of Firm Size on Earnings Per Share Through Financial Leverage -An analytical study of a sample of industrial Firms listed on the Iraqi stock exchange

 

Prepared by the researcher

  • Dr. Zaid M. Alabassi  – Al-Furat Al-Awsat Technical University
  • Dr. Haider Naser – Al-Furat Al-Awsat Technical University
  • Enas Hussien Alwan AL-Yahya – Al-Furat Al-Awsat Technical University

Democratic Arab Center

International Journal of Economic Studies : Twenty-third Issue – November 2022

A Periodical International Journal published by the “Democratic Arab Center” Germany – Berlin.

Nationales ISSN-Zentrum für Deutschland
ISSN  2569-7366
International Journal of Economic Studies

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Abstract

Purpose: The Firm size is one of the determinants of the capital structure, in addition, firm size is one of the factors affecting profitability, and then the study aims to test the effect of firm size (independent variable) on earnings per share (dependent variable) through leverage (mediating variable).

Design, Methodology: The quantitative approach was adopted, (4) industrial Firms  were selected as a sample for the study, and the study used multiple and simple linear regression analysis to test the hypotheses of the study, and the coefficient of interpretation (R2), and the method (Panel Data) was adopted to analyze the data. In addition, Eveiws and AMOS are accredited in analysis.

Results: The study found that the Firm Size affects the earnings per share positively effect, as leverage affects earnings per share positively effect, as well as that the Firm Size affects the leverage positively.

 Practical effects: The study provides a scientific basis for the future study, as it is possible to address other variables and indicators and link them with the variables of the study, as well as the study can be applied in other sectors, and the study lays a scientific basis that contributes significantly to the creation of compatibility between finance and investment.

Originality, Value: The study contributes to the design of a model characterized by originality and modernity, (i.e. linking the Firm Size to earnings per share through leverage), and this helps Firms  to provide the necessary financing and then employ it in investment optimally and this contributes significantly to the survival and growth of Firms , in addition to that the mechanisms provided by the study contribute significantly to increasing the satisfaction of shareholders, who are one of the main pillars of the existence of Firms  and then reflect this positively on the value of the Firm .

Introduction

   The subject of internal determinants of Firms  has become one of the important and sensitive topics, especially in relation to Firms  and researchers alike, as the Firm Size is one of these determinants, so the Firm Size affects investment and financing decisions, as large Firms  have the ability to access capital markets, and this contributes greatly to the provision of funds in a timely manner and then reflects this significantly on the ability of these Firms  (large size) to create and exploit investment opportunities optimally,  This ultimately leads to increased shareholder satisfaction and orientation towards investing in these Firms , thereby increasing the value of the Firm  and enhancing the chances of survival and growth. This is consistent with (Hirdinis, 2019), (Rahman & Yilun, 2021), (Ghofir, & Yusu, 2020), (Niresh & Thirunavukkarasu 2014), (John & Adebayo,  2013 )   Studies show that large-sized Firms  are able to access capital markets and this is reflected in the formulation of their financial structures (Al-Najjar & Kilincarslan, 2018), as the financial structures of these Firms  are flexible, large Firms  do not rely on specific sources of financing, which leads large Firms  to adopt borrowed financing, which explains that the Firm Size affects the leverage,  Large Firms  can exploit their fixed assets to be provided as collateral in order to obtain the necessary financing, and then use this money to exploit lucrative investment opportunities. This is consistent with ( Kartikasari & Merianti, 2016), (Rizqia & Sumiati, 2013), (Trisnawati et al., 2015).  Firms  strive to increase earnings per share, because earnings per share have a prominent role in influencing the behavior of investors, as the main goal of the investor to invest in one Firm  and not others, is the returns he gets from investing in this Firm  compared to the rest of the Firms ,   Earnings per share are linked to the third goal of financial management, which is the goal of maximizing the value of the Firm , and this goal is one of the contemporary objectives of financial management, hence the interest in earnings per share as it relates to promoting the survival and growth of the Firm , if Firms  characterized by high EPS are highly valued and then be able to work under environments characterized by intense competition,  As well as the emergence of many crises in recent times.

   The importance of the study is that it addresses variables of great importance at the corporate level, in addition to that the study dealt with a vital sector, namely the industrial sector, which is one of the main sectors that contribute significantly to increasing state revenues, as well as employing a large number of labor, and thus eliminating unemployment. The study sought to look at a realistic problem suffered by most Iraqi industrial Firms , namely the problem of low earnings per share, and the negative consequences it has on the performance of these Firms  and thus threatens their continuity and survival.

  Methodology

First : –   problem  

  Earnings per share is one of the key elements to consider when analyzing Firms , moreover, EPS is one of the most important financial ratios that investors and stakeholders take into account when making their investment decisions, as the EPS shows how much profit the shareholder will receive. Earnings per share are mostly used to assess profitability and risks associated with profit as well as to evaluate the share price. (Sari, 2021) concluded that low earnings per share negatively affect the Firm ‘s value in the financial market. Moreover, Al-Natsheh & Al-Okdeh (2020) concluded that the low level of EPS led to a decrease in the incentive for investors to invest in Firms , as well as concluded (Safitri & Affandi, 2022) that the decline of EPS leads to a decrease in the value of the Firm , and vice versa.

   When you look at the reports issued by the Iraqi Stock Exchange, and by applying the earnings per share index, it is clear that some industrial Firms , including (National Firm  for Metal Industries) and (Iraqi Firm  for Engineering Works), for example, suffer from the problem of low earnings per share. This decline (in earnings per share) affects the performance of industrial Firms  on the one hand, and on the other hand leads to the aversion of investors to these Firms , which results in a decline in the value of Firms , and then these adverse results result in the inability of the Firms  sampled to grow and continue, especially since these Firms  operate in a volatile environment on the one hand,  And the presence of competing Firms  on the other hand.

From the foregoing, the problem of study can be framed by the following questions :

1- Does the Firm Size affect the earnings per share through leverage?

2- What are the findings of previous literary studies regarding the effect between the Firm Size, Financial leverage and earnings per share?

3- Can you formulate a model that links the variables of the current study, and then provide treatments for the problems experienced by the industrial Firms  of the study sample.

Second : – Objectives 

   The objectives of the study are as follows:

1- Design a model that links the Firm Size, Financial leverage and earnings per share to address the problems experienced by the industrial Firms  of the study sample.

2- Apply the indicators of the study variables to the data of the industrial Firms  sample of the study to determine the level of each of (Firm Size, Financial leverage and earnings of the share) of these Firms .

3 – Measuring the effect between the variables of the study.

4 – Know the findings of previous studies and literature regarding the type of effect between the variables addressed by the current study.

5 – Formulate a scientific and practical basis to benefit future studies.

Thiard : – Model

    The study model gives a clear picture of the study variables, and the study dealt with three variables, where it represents the independent variable (the Firm Size), while the intermediate variable represents (Financial leverage), and the dependent variable is represented by earnings per share. The figure below illustrates the study model.

Fig 1: Study Model

Source : Preparation of researchers based on the literature of the study

Firth : – Hypotheses 

1- The hypothesis of the effect of the Firm Size on earnings per share: Pouraghajan et al., 2013 concluded that the Firm Size positively affects the earnings per share, and (Rachmawati, 2021) pointed out that a study (Doğan, 2013) found that the Firm Size affects positively the earnings per share, as the Firm Size is one of the main determinants of profitability. Pohan (2020) also concluded that the Firm Size and the debt-to-asset ratio have a positive and significant effect on the earnings per share of real estate Firms . Ghofir, & Yusu, 2020: 220) noted that large-scale Firms  are better able to exploit investment opportunities and then make high profits. Hence it can be said:

(Firm size has a significant positive effect on earnings per share)

The effect between the Firm Size and earnings per share can be represented by the following equation:

EPS :Earnings per share.

β0: Fixed limit.

β1: Effect coefficient.

FS: Firm size.

2- The hypothesis of the effect of the Firm Size on Financial leverage: Akinyi (2019) concluded that the Firm Size has a positive effect on the Financial leverage. Vithessonthi & Tongurai (2015) also concluded that Firm size positively affects Financial leverage. Moreover, Siriwardana & Abeywardhana (2021) concluded that the Firm Size has a positive and significant effect on the Financial leverage of industrial and service Firms  in Sri Lanka. Similarly, he concluded (Zuhroh, 2019: 208) that the Firm Size has a positive effect on Financial leverage. Hence it can be said:

   (Firm size has a significant positive effect on Financial leverage)

   Through the second main hypothesis, the following sub-hypotheses can be formulated:

 – The Firm Size has significant positive effect on debt ratio, and the following equation represents this:

 DR: Debt ratio.

β0: Fixed limit.

β1: Effect coefficient.

FS: Firm size.

– The Firm Size has a significant positive effect on the Debt to equity ratio, and the following equation represents this:

DtoER :debt to equity ratio.

β0: Fixed limit.

β1: Effect coefficient.

FS: Firm size.

3- The hypothesis of the effect of Financial leverage on earnings per share: (Karlina & Ramadhan, 2019) concluded that Financial leverage positively affects earnings per share. The results of a study (Putra, 2013) also showed that Financial leverage positively and morally affects earnings per share. Moreover, he concluded (Li & Hwang, 2011) that Financial leverage positively affects profitability. A study (Wijaya, 2016) found that Financial leverage affects earnings per share in the telecommunications industry. Hence it can be said:

   (Financial leverage (with its indicators) has a significant positive effect on earnings per share)

The effect between Financial leverage and earnings per share can be represented by the following equation:

EPS :earnings per share.

β0: Fixed limit.

β1: Effect coefficient.

 DR :Debt ratio.

 DtoER :debt to equity ratio.

4- The hypothesis of the effect of the Firm Size on earnings per share through Financial leverage: Based on the findings of previous studies regarding the direct relationship between the variables of the study, so the indirect relationship between the variables of the study will be tested in the current study. The current study assumes that increasing the Firm Size increases the ability of Firms  to adjust the Financial leverage to the target levels, and then this adjustment (reaching the target levels) will lead to an increase in earnings per share. Based on the above, the following hypothesis can be formulated:

   (Firm size has a significant positive effect on earnings per share through Financial leverage)

The effect between the Firm Size in earnings per share can be represented by Financial leverage according to the following equation:

EPS :earnings per share.

β0: Fixed limit.

β1: Effect coefficient.

 FS :Firm size.

 FL :Financial leverage.

Sixth:- Data

     Represent the study community of industrial Firms  listed on the Iraqi Stock Exchange. The sample of the study was selected according to several criteria including, its listing on the Iraq Stock Exchange in 2004 and continued within the time limits (2016-2020), as well as the availability of data both in reports and in bulletins issued by the Iraq Stock Exchange and the Securities Commission. The table below represents the sample study.

Table 1: Firm study sample

Name Firm Code Establishing Date Listing Date Capital at Listing Firm Address
Metallic Industries IMIB 1964 2004 4000000000 Baghdad
Iraq Engineering Works IIEW 1985 2004 240000000 Baghdad
Al-Mansour Pharmaceuticals Industries IMAP 1989 2004 330000000 Baghdad
Baghdad Soft Drink IBSD 1989 2004 10000000000 Baghdad
Modern Paint Industries IMPI 1976 2004 1755000000 Baghdad

Source: Financial reports issued by the Iraq Stock Exchange.

Theoretical framework of the study

First: – The concept of the Firm Size

    The Firm Size is one of the main determinants of the Firm ‘s profitability (Hirdinis, 2019: 179), and therefore the Firm Size improves the performance of the Firm , so Firms  always seek to increase their size (Rahman & Yilun, 2021:101). Ghofir, & Yusu, 2020: 220) points out that large-scale Firms  have large capital and high profits. Investors usually take the size of a Firm  into account when they go to invest in Firms , as the activities of large-scale Firms  are diverse (Sukma et al., 2022: 29), large Firms  attract investors, as well as creditors trust that large Firms  are less at risk of bankruptcy (Ladewi, 2022: 88). Thus, the Firm Size is a decisive factor for its success due to economies of scale, which leads to its acquisition of a competitive advantage in the form of reducing costs and increasing market share (Ayuba et al., 2019: 59). The size of a Firm  is one of the variables widely used in clarifying changes in the financial statements of Firms , and large Firms  usually publish their financial statements compared to small Firms  (Respati & Oktaviani, 2022: 31). Large Firms  display their financial statements because they are mostly subject to public supervision (Karina, R., & Soenarno, 2022:296). Large Firms  will be able to access the capital market, and then these Firms  will have access to the capital market and then get the money in a timely manner. Therefore, larger size Firms  are expected to have the ability to make larger profits, by increasing their ability to optimally exploit investment opportunities, as well as being able to pay higher profits compared to small businesses (Sitepu, 2022: 135), and Firm size is one of the factors influencing the growth of the Firm  (Kim, 2022: 167), as Kim,  2022: 167) indicates that the growth rate increases as the Firm Size increases, and that the optimal use of the Firm ‘s assets leads to higher earnings per share (Sihombing et al., 2021:6586). (Chandra et al., 2020:59), (Karina, R., & Soenarno, 2022:296) defines Firm size as a measure expressed in various ways, such as record size, market capitalization, total assets… Etc. Atmaja (2008) defined a Firm ‘s size as a measure of corporate classification, which is the total assets a Firm  owns (Zuhroh, 2019: 208). The Firm Size is the total assets owned by the Firm  (Sihombing et al., 2021:6586).

  Measuring the Firm Size

   The size of a Firm  is measured by the natural logarithm of total assets (Hirdinis, 2019: 179), (Yuliarti & Diyani, 2018: 231), and according to the following equation: (Ayuba et al., 2019:65)

FS = log TA

FS: Firm Size.

log TA :Natural logarithm of total assets.

Second: – The concept of Financial leverage

   The term Financial leverage describes the ratio of long-term debt to total equity in a capital structure (Ibrahim & Isiaka, 2020: 126). Financial leverage means that a Firm  resorts to borrowing to finance investments (Indrawan & Damayanthi, 2020: 10), (Bitok et al., 2021: 6), Financial leverage is a combination of long- and short-term debt in a Firm ‘s financial structure (Abubakar, 2021: 1471), and Financial leverage is a key component of the corporate financial structure (Onyema & Oji, 2018: 47), (Fitrianingsih et al., 2022:22). Financial leverage has been the focus of many theories in the field of financial thought in general and capital structure in particular, including (Modigliani and Miller, 1958), (Modigliani and Miller, 1963), agency theory, swap theory and capture theory (Ibrahim & Isiaka, 2020: 126). Financial leverage is the process of using debt as sources of financing in order to exploit investment opportunities, hence the reflection of this on profitability (Al-Slehat et al., 2020: 110). Financial leverage is one of the main determinants of profitability (Dzafic & Polic, 2019: 66). Padmini & Ratnadi (2020:197) believes that Financial leverage is the financing of part of a Firm ‘s assets with fixed-interest rate securities, and this measure contributes to improving profitability, but the Firm  must take into account that ineffective use of debt (poor debt management) will increase the risk of bankruptcy. On the other hand, Bui (2020: 286) points out that Financial leverage leads to improved financial performance, as financially raised Firms  enjoy the advantages of tax savings (lower taxable income), i.e. a decrease in the total amount of income tax that the Firm  has to pay to the state, and therefore it can be said that Financial leverage improves the financial performance of the Firm . Moreover, Financial leverage will increase asset growth and thus sales growth (Samo & Murad, 2019: 294). Raymar (1991) defines Financial leverage as the extent to which a Firm  relies on loans to finance its investments (Pham, & Nguyen, 2019: 4). (Al-Slehat et al., 2020: 110) defined Financial leverage as the use of debt in a capital structure, as a Firm  resorts to this measure to exploit investment opportunities. (Bunyaminu,2021: 69) defined Financial leverage as the ratio of total liabilities to total assets. (Ibrahim & Isiaka, 2020: 126) defines Financial leverage as the level of debt included in a Firm ‘s capital structure as opposed to ownership. Financial leverage is the ratio of the total market capitalization of a debtor Firm  to the total market capitalization of its shares (Abubakar, 2021: 1471).

   Financial leverage Measurement

   Financial leverage is measured by the ratio of total liabilities to total assets (debt ratio), and the Debt to equity ratio (Oware & Mallikarjunappa, 2019: 306), (Zelalem, 2020: 64), (Al-Slehat et al., 2020: 110).

1- The ratio of liabilities to assets: which is the ratio of liabilities to assets, and the higher this ratio indicates the increase in Financial leverage Ruslim & Muspyta, 2021: 40)), according to the following equation: (Al-Slehat et al., 2020: 110).

  Debt ratio:  Debt ratio.

TL: Total liabilities.

TA: Total assets.

2- Debt to equity ratio: It is the Debt to equity ratio, and the higher this ratio indicates the greater the Firm ‘s dependence on debt to finance investments (Zelalem, 2020: 64), and according to the following equation: (Onyema & Oji, 2018: 47), (Banal Estanol et al., 2022: 12), (Gamlath, 2019: 4)

Dto ER: Debt to equity ratio.

TD: Total debt.

TE: Total Equity.

Third: – The concept of earnings per share

   The EPS is the backbone that underpins strategic decisions, such as valuing shares, developing incentive plans and negotiating mergers and acquisitions. Earnings per share are the most common measure of financial performance (de Wet, 2013: 265), and earnings per share is seen as one of the methods adopted to measure shareholder profits (Arsal, 2021: 12). Shareholders are interested in Firms  that achieve a high EPS (Fitriyani et al., 2022: 4563). Earnings per share (Tobias & Macharia, 2019: 20), a rise in EPS gives positive signals that attract investors to buy Firm  shares, and ultimately leads to a rise in the Firm ‘s value (Hidayat et al., 2022: 5156). Directors usually strive to achieve the goals of shareholders and since earnings per share is an indicator of shareholders’ earnings, The administration therefore seeks to maximize (EPS) (de Wet, 2013: 265). Earnings per share is one of the financial performance indicators that shows the erection per share of the profits achieved, and paragraph 14 of IAS 33 indicated that a Firm ‘s profits should be adjusted through tax expenses and dividends for preferred shares (Mathews, 2022: 123). Rachmad, 2018) defines earnings per share (EPS) as the ratio of net profit after tax to the number of shares. As earnings per share (EPS) are used to calculate dividends for shareholders, the higher the value of earnings per share, the greater shareholder satisfaction (Risanti & Murwanti, 2022: 10710), (Bessong et al., 2020: 3716). In what Siauwijaya (2020: 279) defined earnings per share as earnings obtained from each stock,  It is the profits obtained from each stock, and is a useful measuring tool for comparing an entity’s profits from time to time. Sudibyo (2021: 52) defined earnings per share as a ratio showing the amount of profit an investor or shareholder receives per share, and an EPS equal to net income divided by the number of common stocks. Earnings per share of profits earned per share are one of the main indicators of a Firm ‘s profitability (Amiputra et al., 2021: 202).

Measuring earnings per share

   Earnings per share is calculated by dividing earnings after interest and taxes (net income) by the number of shares (Umelo et al., 2021:127), and as in the equation below: (Brigham & Ehrhardt, 2017: 117), (Umelo et al., 2021:127) (Maulidina et al., 2021:8), (Fitriyani et al., 2022: 4563), (Siauwijaya, 2020: 279)

EPS: earnings per share.

NI: Net income.

NS: Number of Sharres Outstanding.

Practical framework of study

First: – Financial analysis of the variables of the study

1- Analysis of the Firm Size: Through this paragraph, the results of the Firm Size for the period (2016-2020) are presented and analyzed.

Table 2: Results of the analysis of firm size

Firm  Name /Year 2016 2017 2018 2019 2020 Average
Metallic Industries 9.432 9.381 9.364 9.355 9.340 9.375
Iraq Engineering Works 9.134 9.105 9.112 9.101 9.050 9.100
Al-Mansour Pharmaceuticals Industries 9.911 9.906 9.978 9.842 9.744 9.876
Baghdad Soft Drink 11.421 11.508 11.544 11.606 11.680 11.552
Modern Paint Industries 9.692 9.686 9.664 9.715 9.694 9.690
Period Average 9.918 9.917 9.933 9.924 9.902 9.919

Source: output (Excel).

    It is clear from Table 2 that Firms  have achieved a variation in the natural logarithm of total assets. The Iraq Engineering Works firm has achieved the lowest rate among the industrial firms  researched, with the Firm’s average (9.100), and it has achieved the highest value in the year (2016) if the value of the logarithm in this year (9.134), and in the year (2020) the Firm  achieved the lowest value, as the value of the logarithm (9.050). Baghdad Soft Drink firm achieved the highest average among the industrial firms researched. The firm’s average was (11.552). It achieved the highest value in the year (2020) with the value of the logarithm in this year (11.680), and in the year (2016) the Firm  achieved the lowest value, with the value of the logarithm (11.421). The rest of the Firms  have achieved varying rates between the highest and lowest value.

Figure 2: Firm size curve

   Figure 2 shows the duration rate, and shows the low natural logarithm rate of total assets for the time series. It was the lowest rate in 2020, at 9.902. The highest rate was in 2018, at 9.933.

2- Financial leverage analysis: In this paragraph (Debt ratio, Debt to equity ratio) for the period (2016-2020) is presented and analyzed.

Table 3: Results of the analysis of the debt ratio

Firm  Name /Year 2016 2017 2018 2019 2020 Average
Metallic Industries 1.289 1.640 2.103 2.332 2.463 1.966
Iraq Engineering Works 0.033 0.035 0.090 0.082 0.089 0.066
Al-Mansour Pharmaceuticals Industries 0.076 0.059 0.190 0.207 0.090 0.124
Baghdad Soft Drink 0.099 0.048 0.049 0.093 0.108 0.079
Modern Paint Industries 0.018 0.015 0.016 0.034 0.022 0.021
Period Average 0.303 0.360 0.490 0.550 0.555 0.451

Source: output (Excel).

   It is clear from Table 3 that Firms  have achieved a disparity in the debt ratio. The Modern Paint Industries firm has achieved the lowest rate among the researched industrial firms , as the firm’s average was (0.021), and it achieved the highest debt ratio in the year (2019) if the debt ratio in this year (0.034), while it achieved the lowest debt ratio in the year (2017), as the debt ratio in this year (0.015). On the other hand, the Metallic Industries firm achieved the highest average among the industrial firms researched, with the firm’s average (1.966). It achieved the highest debt ratio in the year (2020) as the debt ratio in this year (2.463), while the lowest debt ratio achieved by the Firm  was in the year (2016) as debt ratio in this year (1.289). The rest of the Firms  have achieved varying rates between the highest and the lowest.

                                Figure 3: Debt ratio curve

   Figure 3 shows the duration rate, and shows the high rate of debt ratio for the time series. It was the lowest rate in 2016, at 0.303. The highest rate was in 2020, at 0.550.

Table 4: Results of the analysis of the Debt to Equity ratio

Firm  Name /Year 2016 2017 2018 2019 2020 Average
Metallic Industries 0.446 2.561 1.906 1.751 1.683 1.670
Iraq Engineering Works 0.034 0.036 0.099 0.090 0.098 0.071
Al-Mansour Pharmaceuticals Industries 0.082 0.062 0.236 0.261 0.087 0.146
Baghdad Soft Drink 0.110 0.051 0.052 0.102 0.121 0.087
Modern Paint Industries 0.018 0.016 0.016 0.036 0.023 0.022
Period Average 0.138 0.545 0.462 0.448 0.403 0.399

Source: output (Excel).

    It is clear from Table 4 that Firms  have achieved a disparity in the debt to equity ratio. The Modern Paint Industries firm  has achieved the lowest rate among the researched industrial firms , with the firm’s average (0.022), and has achieved the highest debt to equity ratio in 2019 if the debt to equity ratio in this year (0.036), while it achieved the lowest debt to equity ratio in the years (2017) and (2018), as the debt to equity ratio in these two years (0.016). On the other hand, the Metallic Industries firm achieved the highest average among the industrial firms researched, with the firm’s average (1.670). It achieved the highest debt to equity ratio in 2017 with the debt to equity ratio in this year (2.561), while the lowest debt to equity ratio achieved by the firm  was in 2016, with the debt to equity ratio in this year (0.446). The rest of the firms  have achieved varying rates between the highest and the lowest.

                                                     Figure 4: Debt to equity ratio curve

   Figure 4 shows the duration rate, and shows the high debt to equity ratio for the time series. The lowest rate in 2016 was 0.138. The highest rate was in 2017, at 0.545.

3- Analysis of earnings per share: In this paragraph, the results of the ratio of net income to the number of shares for the period (2016-2020) are presented and analyzed.

Table 5: Results of the analysis of the earnings per share

Firm  Name /Year 2016 2017 2018 2019 2020 Average
Metallic Industries -114.605 -1.608 -2.180 -1.116 -0.491 -24.000
Iraq Engineering Works -14.448 -5.423 -1.170 -1.816 -12.206 -7.012
Al-Mansour Pharmaceuticals Industries -0.137 0.051 0.064 -1.165 0.089 -0.220
Baghdad Soft Drink 1.981 3.164 4.816 7.856 8.558 5.275
Modern Paint Industries -1.090 -28.768 -1.293 -0.234 -3.727 -7.022
Period Average -25.660 -6.517 0.047 0.705 -1.555 -6.596

Source: output (Excel).

   It is clear from Table 5 that Firms  have achieved a variation in earnings per share. The Metallic Industries firm has achieved the lowest rate among the industrial firms  researched, with the firm’s average (-24.000), and has achieved the highest earnings per share in the year (2020) if the earnings per share in this year (-0.491), while it achieved the lowest earnings per share in the year (2016), as the earnings per share in this year (-114.605). On the other hand, Baghdad Soft Drinks firm achieved the highest average among the industrial firms  researched, with the firm’s average (5.275). It achieved the highest earnings per share in the year (2020) as the earnings per share in this year (8.558), while the lowest earnings per share achieved by the firm was in the year (2016) where the earnings per share in this year (1.981). The rest of the firms have achieved varying rates between the highest and the lowest.

Figure 5: Earnings per share curve

    Figure 5 shows the duration rate, and shows the high earnings per share rate for the time series. It was the lowest rate in 2016, at -25,660. The highest rate was in 2019, at 0.705.

Second: – Statistical analysis of study variables

  • Time series stability test: The time series stability test is often performed to achieve a certain goal, and this goal is to address the problems that may arise represented by the high amount of the determination coefficient (if the height is not real), as well as the high beta value. Time series stability is tested by unit root testing, as a period change may cause a change in the shape of the distribution. The stability of the series for the three study variables will be tested. As shown in the figure below.

Table 6: unit root test for study indicators

Indications Level First Deference
ADF

Statistics

Result ADF

Statistics

Result
Log TA -27.60850*** Stationary
DR -17.14730*** Stationary
DtoER -23.72416*** Stationary
NI to NS R -9.34916*** Stationary

Source: output of the Eveiws.

   It is clear from Table (6) that all indicators were stable at the level, that is, the time series is stable and that all indicators have computational media and constant variance, so the results of the analysis are accurate and reliable, so the multi-regression method will be adopted to measure and analyze the effect between the study variables.

  • Analysis and testing of the hypothesis of the first study (the firm size has a significant positive effect on the earnings per share), as the program (EViews) will be adopted in the analysis and extraction of results.
Table 7: The results of testing the effect of firm size on the  earnings per share for the study sample firms
independent indicators
dependent variable Coefficient Std. Error t-Statistic P Value Decision
FS EPS 0.587 0.491 11.657 0.000 Accept the hypothesis
C 0.54 Method: Pooled Least Squares

 

EPS=(0.54)+(0.587)FS

 R2 0.61
F-statistic 7.103
F Sig 0.000
Fixed Effects (Cross) Fixed Effects (Period)  
 Cross Coefficient Arrangement  Period Coefficient Arrangement  
IMIB-C 0.23 2 2016-C -0.02 5  
IIEW-C 0.27 1 2017-C 0.04 3  
IMAP-C 0.02 5 2018-C 0.01 4  
IBSD-C 0.16 3 2019-C 0.09 1  
IMCI-C 0.05 4 2020-C 0.07 2  

Source: output of the Eveiws.

    According to the results of Table (7), the Firm Size has a significant positive effect on the earnings per share, and the amount of effect has reached (0.587), and the value of (P Value) (0.000), which is less than (0.05). Based on these results and the significance of (F) it can be said to accept the first hypothesis, as the coefficient of determination (R2) (0.65) and this indicates that the firm Size explains (0.61) of the change in earnings per share.

    The results of Table (7) show that (Iraqi Engineering Works Firm) was characterized by the percentage of the effect of the firm size on the earnings per share, while (Al-Mansour Pharmaceutical Industries Firm) was in the last rank in terms of the percentage of the effect of the firm size on the earnings per share. As for the degree of differentiation at the level of years, the year (2019) was the highest in terms of the percentage of the effect of the firm size on earnings per share, and the year (2016) was the lowest in terms of the percentage of the effect of the firm size on the earnings per share.

3- Analysis and testing of the hypothesis of the second study (the firm size has a significant positive effect on financial leverage), as the program (EViews) will be adopted in the analysis and extraction of results. Sub-hypotheses emanating from the second main hypothesis will be tested.

– Test the hypothesis of the effect of the Firm Size on Debt ratio.

Table 8: The results of testing the effect of firm size on the  debt ratio for the study sample firms
independent indicators
dependent variable Coefficient Std. Error t-Statistic P Value Decision
FS DR 0.612 0.632 14.021 0.000 Accept the hypothesis
C 0.59 Method: Pooled Least Squares

 

DR=(0.59)+(0.612)FS

 R2 0.67
F-statistic 9.013
F Sig 0.000
Fixed Effects (Cross) Fixed Effects (Period)  
 Cross Coefficient Arrangement  Period Coefficient Arrangement  
IMIB-C 0.19 1 2016-C 0.05 3  
IIEW-C 0.01 3 2017-C -0.05 4  
IMAP-C -0.03 4 2018-C -0.08 5  
IBSD-C -0.10 5 2019-C 0.07 2  
IMCI-C 0.09 2 2020-C 0.12 1  

Source: output of the Eveiws.

   According to the results of Table (8), the firm size has a significant positive effect on the debt ratio, and the amount of effect has reached (0.612), and the value of (P Value) (0.000), which is less than (0.05). Based on these results and the significance of (F) it can be said to accept the first sub-hypothesis, as the coefficient of determination (R2) (0.67) and this indicates that the firm size explains (0.67) of the change in debt ratio.

  The results of Table (8) show that (Metallic Industries firm) was characterized by the percentage of the effect of the firm size on debt ratio, while (Baghdad Soft Drink Firm) was in the last ranking in terms of the percentage of the effect of the firm size on debt ratio. As for the degree of differentiation at the level of years, the year (2020) was the highest in terms of the percentage of the effect of the firm size in debt ratio, and the year (2018) is the lowest in terms of the ratio of the effect of the firm size on debt ratio.

– Test the hypothesis of the effect of the Firm Size on the Debt to equity ratio.

Table 9: The results of testing the effect of firm size on the  debt to equity ratio  for the study sample firms
independent indicators
dependent variable Coefficient Std. Error t-Statistic P Value Decision
FS DtoER 0.597 0.493 12.027 0.010 Accept the hypothesis
C 0.47 Method: Pooled Least Squares

 

D to E R =(0.47)+(0.597)FS

 R2 0.65
F-statistic 7.998
F Sig 0.000
Fixed Effects (Cross) Fixed Effects (Period)  
 Cross Coefficient Arrangement  Period Coefficient Arrangement  
IMIB-C -0.01 3 2016-C 0.14 1  
IIEW-C -0.06 4 2017-C 0.03 4  
IMAP-C 0.08 1 2018-C 0.07 2  
IBSD-C 0.03 2 2019-C -0.02 3  
IMCI-C -0.10 5 2020-C -0.06 5  

Source: output of the Eveiws.

   According to the results of Table (9), the firm size has a significant positive effect on the debt to equity ratio, and the amount of effect has reached (0.597), and the value of (P Value) (0.01), which is less than (0.05). Based on these results and the significance of (F) it can be said to accept the second sub-hypothesis. The determination coefficient (R2) was (0.65) and this indicates that the firm size explains (0.65) of the change in the Debt to equity ratio.

   The results of Table (9) show that (Al-Mansour for Pharmaceutical Industries Firm) was characterized by the ratio of the effect of the firm size on debt to equity ratio, while (Modern Paint Industries Firm ) was in the last rank in terms of the ratio of the effect of the firm size on debt to equity ratio. As for the degree of differentiation at the level of years, the year (2016) was the highest in terms of the ratio of the effect of the firm size on debt to equity ratio, and the year (2020) is the lowest in terms of the ratio of the effect of the firm size on debt to equity ratio.

  • Analysis and testing of the hypothesis of the third study (Financial leverage has a significant positive effect on earnings per share), as the program (EViews) will be adopted in the analysis and extraction of results.
Table 10: The results of testing the effect of financial leverage on the   earnings per share  for the study sample firms
independent indicators
dependent variable Coefficient Std. Error t-Statistic P Value Decision
DR EPS 0.428 0.170 4.489 0.000 Accept the hypothesis
DtoER EPS 0.389 0.099 3.898 0.010 Accept the hypothesis
C 0.26 Method: Pooled Least Squares

 

EPS=(0.26)+(0.428)DR+(389) D to E R

 R2 0.50
F-statistic 5.689
F Sig 0.000
Fixed Effects (Cross) Fixed Effects (Period)  
 Cross Coefficient Arrangement  Period Coefficient Arrangement  
IMIB-C 0.02 1 2016-C -0.06 4  
IIEW-C -0.04 3 2017-C 0.07 2  
IMAP-C 0.01 2 2018-C 0.11 1  
IBSD-C -0.13 5 2019-C -0.08 5  
IMCI-C -0.09 4 2020-C -0.03 3  

    Source: output of the Eveiws.

   According to the results of Table (10), debt ratio has a significant positive effect on the earnings per share, and the amount of effect has reached (0.428), and the value of (P Value) (0.000), which is less than (0.05), and that the debt to equity ratio has a positive effect on the earnings per share, and the amount of effect has reached (0.389), and the value of (P Value) (0.01), which is less than (0.05). Based on these results and the significance of (F) it can be said to accept the third main hypothesis. The determination coefficient (R2) has reached (0.50) and this indicates that the Financial leverage explains (0.50) of the change in earnings per share.

   The results of Table (10) show that (Metallic Industries Firm) was characterized by the ratio of the effect of financial leverage in the earnings per share, while (Baghdad Soft Drink Firm ) was in the last rank in terms of the ratio of the effect of financial leverage on earnings per share. As for the degree of differentiation at the level of years, the year (2018) was the highest in terms of the ratio of the effect of financial leverage on earnings per share, and the year (2019) was the lowest in terms of the ratio of the effect of financial leverage on earnings per share.

5- Analysis and testing of the hypothesis of the fourth study (firm size affects on earnings per share through financial leverage), as the program (AMOS) will be adopted in the analysis and extraction of results.

According to the hypothesis of the fourth study, firm size will increase the earnings per share through financial leverage, as industrial firms will resort to using their assets to provide the necessary financing by resorting to capital markets (using assets as collateral to obtain the required financing, and therefore this will increase their ability to exploit investment opportunities optimally, which reflects positively on earnings per share. Figure 6 and Table 11 show the results of the analysis.

Figure 6: Testing the effect between firm size, financial Financial leverage and earnings per share

Source: output of the AMOS.

Table 11: The results of testing the effect between firm size, financial Financial leverage and earnings per share

Path Estimate S.E. C.R P
FS         FL 0.61 0.13 9.15 0.000
FL          EPS 0.72 0.22 15.78 0.000
FS          EPS 0.32 0.04 2.19 0.010

   Source: output of the AMOS.

   It is clear from the results of Figure (6) and Table (11) that firm size affects on financial leverage of a significant positive effect, as the amount of effect (0.61), and that the values of both (P, C.R.) indicate the achievement of the significant of the effect, if it is within the required ranges. In addition, financial leverage affects earnings per share significantly by (0.72), and the values of both (P, C.R.) indicate that the significant of the effect has been achieved, as it is within the required ranges.

  From the results of Figure 6 and Table 11 above, it is clear that the direct effect of the firm size on earnings per share is less than the indirect effect (the effect of the firm size on earnings per share through financial leverage), and based on these results the fourth hypothesis is accepted.

CONCLUSION

1- The findings of the current study are in line with the findings of most studies, which is that the firm size affects a positive and significant on the earnings per share.

2- The results showed a decrease in earnings per share of Metallic Industries firm.

3- Decrease in earnings per share of Iraq Engineering Works firm.

4- There is a significant positive effect of financial leverage on earnings per share, as resorting to adjusting the financial leverage according to the nature of Iraqi firms , contributes significantly to increasing the earnings per share.

5- The results showed that Baghdad Soft Drink Firm  has achieved the highest average of earnings per share.

6- There is a significant positive effect of the firm size on earnings per share through financial leverage, (indirect effect) higher than the direct effect, we conclude from this that large firms  are able to adjust the debt ratio by providing their assets as collateral to obtain the necessary financing.

RECOMMENDATIONS

1- The need to conduct further studies on the variables of the current study, and to include sectors other than those dealt with in the current study.

2- The researchers recommend the managers of the Metallic Industries Firm to adopt the internal sources of financing in the financing, as well as to create a balance between short-term investment and long-term investment, as this helps it to increase its investment capacity, and thus increase the profitability per share.

3- The need for managers in the Iraq Engineering Works Firm to set target levels of debt ratio , as well as to rely on specific sources of financing, as this leads to an increase in the ability to invest and then to increase profitability.

4- The researchers recommend that the firms  in the study sample adopt the approach of pecking-order theory in financing, (retained earnings, borrowing, issuing shares), as the adoption of this approach leads to an increase in the ability to investment and then the earnings per share.

5- Baghdad Soft Drinks Firm  can adjust its financial leverage in line with the optimal exploitation of investment opportunities (enhance profitability), especially since its profits are high, and this is reflected in its ability to meet its financial obligations (free from the restrictions of bankruptcy).

6- The researchers recommend that the industrial firms  of the study sample (with low financial leverage), adjust the debt ratio, and this is done by providing their assets as collateral to obtain the necessary financing, and this ultimately leads to an increase in the earnings per share and then maximize the value of the firm .

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