Mediation Effects of Financial Performance between Assets Utilization and the Market Value of Palestinian Listed Firms

Abstract

Purpose: This paper examines the impact of asset utilization on the firm's market value and the mediating role of financial performance on a sample of non-financial sectors listed on the Palestinian stock exchange from 2010 to 2018. Design/methodology/approach: This study uses a quantitative research approach as it incorporates financial variables, including assets utilization, financial performance (ROA), market value, growth opportunities, firm size, and debt ratio. Findings: The analysis indicates that asset utilization enhances the financial performance of firms and, in turn, the market value of firms. Thus, financial performance mediates the relationship between asset utilization and the firm's market value. Additionally, the growth opportunities and the firm's size positively and directly affect the financial performance. It also indirectly impacts the market value of the firm. In contrast, the debt ratio has a negative impact on financial performance and market value. Generally, these findings are aligned with Signalling and Agency Theories predictions in light of weak corporate governance and high concentration ownership in Palestine and investors' concerns regarding wasting firm assets, unless it enhances the firm's financial performance. Research limitations/implications: This study was conducted using a sample of non-financial Palestinian sectors. Thus, future studies may examine factors included in this study on Palestinian financial industries to generalize findings for the Palestinian market. Additionally, this study used share prices to measure the market value of firms and return on assets as a measure of financial performance. Thus, future studies may consider other criteria, such as price to book value (to gauge whether a stock is valued correctly. Originality/value: Palestine is one of the countries in MENA region that has unclear effects of asset utilization on firm's performance. Accordingly, this study highlights investors' fear regarding mismanagement related to the utilization of a firm's assets, particularly where there is a negative relationship between asset utilization and market value but a positive impact on financial performance. This paper provides a clear empirical evidence on how the asset utilization could be utilized in such market to reduce agency problem and to signal quality management to the outsiders.