Firm Value and Profitability of Saudi Arabian Companies Listed on Tadawul: Moderating Role of Capital Structure

Abstract

The impact of profitability on firm value was always been a matter of great interest for financial managers, because the objective of a company is to increase its value and on the other hand the investors expect higher returns on their investment. Therefore, the purpose of present research is to investigate the impact of profitability on firm value moderated with capital structure in different Saudi Arabian companies. The profitability is measured in terms of ROA (Return on Assets) and ROE (Return on Equity), firm value is calculated using Tobin's Q. Capital structure is measured with the debt-equity ratio. The study selects different companies listed on Tadawul as a sample and the study period starts in 2013 and ends in 2020. To analyze the data collected from the annual reports of listed companies, the study reports results by employing panel regression with FE and RE model, and panel GMM. The analyzed results report a positively significant impact of profitability on firm value and a negative and significant effect of capital structure on firm value in all the estimated models. Further, the capital structure interacts as a moderator between profitability and firm value, where the study finds a negatively significant effect of profitability on firm value after moderation. The results strengthen the moderation of capital structure between profitability and firm value.