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The Profitability, Capital Structure, and Cash flow of banks,

along with their ownership structure, affect banks’ financial
strength.
Main Author:
HAMED Ali JASEM ALFAWAREH. PhD Researcher
University of Technology – Malaysia
ha1069879@gmail.com
Co-author:
Dr Hjh Othman
University of Technology – Malaysia
Rafidah.othman@utm.my

Abstract
The research study‟s goal emerges in this chapter. The debate focuses on market share. The theoretical rationale for
the accumulation of market share is discussed. Besides literature related to market share price, past research findings
lead to finding the research gap and establishing the research of hypothesis. This paper‟s main objective is to
conduct a systematic review of the papers that investigated The Profitability, Capital Structure, and Cash flow of
banks, along with their ownership structure, affect the financial strength of banks. This critical review lists the
comprehensive inclusion/exclusion criteria; the core framework, however, is the following: Assess the role of
entrepreneurial incubators and innovation of the topic against the concern raised in the research question (i.e.
developing countries). Creating a trend and connections between the literature available (i.e. identifying the most
common factors and relevancy to the topic innovation in the developing countries).

Keywords: Systematic review, banks, profit, capital structure.

Introduction

A visualization of the relationship between the various conceptual model hypotheses. Volatility refers to how often
the demand shifts. Stocks that fluctuate wildly and fail to have a stable price point are called unstable. The stock is
weakly predictable since it maintains a fixed price. Investors, regulators, traders, dealers and the press were all
worried about the amount of overall uncertainty in the stock market. The perception that stocks are moving a lot is
since too high levels of common stock indices have been present. The collapse of financial markets is an important
issue that has caused a lot of damage.
There is a crucial gap in the literature regarding the profitability, debt, and cash flow of the bank in the Atab sense
and why it affects the stock price. This paper explores the context of past literature.

Literature Review.
This is an established assumption because investors are key to the capital market. Messaging investors focuses on
clarity and scientific proof, especially at the time of pricing securities, and also when advising on possible changes
to those prices. The high liquidity of the stock market has resulted in a number of papers and publications on the
financial market (e.g., Haque et al., 2013; Akbar & Afiezan, 2018; Mbaabu, 2018; Tayar et al., 2019; Suryana &
Anggadini, 2020). These factors contribute to the press, political stability, and economic situation with the paper
(Haque et al., 2013; Causi, 2017).
The stock market process is not simple; due to complex factors and variables, the market is governed by
sophisticated aspects and variables. At the same time, efforts are being made at both the firm and national level to
develop sustainable economic structures (Causi, 2017). The basis of such an economy is a shift from a rigid, static,
and unstable economic system to a more complex, stable, and safer economic system. In addition, this led to higher
real efficiency (Stapley, 1986; Marwala, T., & Hurwitz, 2017; Causi, 2017).
The stock market in the Middle East is different from the market in some counties. Despite some challenges, these
markets show good investment and returns. Most capital is spent in the banking sector because of how stable it is.

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When major stock-market companies grow a broader shareholder base, their economic returns are approximately
equal or higher. It is also a fact that money investors like their leverage in some way, so to keep them in stock
market firms, separate stock exchanges offer liquid equity markets to investors. Here, their money is more stable,
but it still seems to hold more appeal. A buyer may sell their shares at a reasonably low price; (Hajar & Tho‟in,
2015; Masoud, 2013).
El-Ansary & Megahed (2016) aim to investigate the factors that decide bank profitability in Egypt prior to and
following the global financial crisis. This paper explores the period from 2004-2013. They analyzed the data on how
people were doing ten years before the crisis and then ten years after the crisis. They use ROA and ROE to
determine the profitability of banks. The findings show that the variables that decide bank profitability didn‟t change
substantially between pre-crisis and post-crisis, and there were no major changes in bank profitability between the
two periods. In addition, credit quality, loan to assets ratio, deposit to total assets ratio have a negative relation to
profitability, while asset share ratio has a positive relation to profitability. However, the ratio of capital assets and
banks assets to GDP doesn‟t have much impact on bank profitability.

The financial and economic choices of firms, as well as their reactions to changes in monetary weight, are important
to both nation‟s macroeconomic conditions and the soundness of its financial system. This, for example, influences
speculative spending or, despite a sudden shock, fast, sharp portfolio changes. Nonetheless, from the point of view
of acknowledging the dangers to macroeconomic and monetary dependability, it ought to be borne as a top priority
that the delicacy of individual companies need not be counterbalanced by the sufficiency of others. In conjunction,
the study of total markers to determine the financial condition of the corporate division and its effect on genuine
action may be missing, which necessitates a more detailed analysis. However, this implied that the earnings per
share had a valuable and important wave pricing value, Malhotra, 1987. His goal was to concentrate on the four
segments of the executive, cotton material, food and paper industries over four years from 1982 to 1985. Baskin
(1989), Collins and Kothari (1989) and other research studies all support the positive association between asset price
and stock price appreciation. Ohlson (1995) addresses the task of generating money, controlling value, and
accounting for profits. Collins, Pincus, and Xie (1999) studied the association between stock performance and
negative earnings. Dechow, Hutton, and Sloan (1999) investigate the connection between income remaining and the
equity value.
In the earnings multiplier model, earnings are the most significant factor that defines the financial wellbeing and the
actual value of a company. Investors decide on choices based upon open data like details which are taken as markers
of an organization‟s budgetary health and possibilities and, along these lines determining the offer value (Al-
Malkawi, 2007). Knowledge on the impact of earnings on share prices is extremely calculable as it would aid in
determining value volatility and in the forecast of value growth to empower companies to upgrade their fair worth
and financial specialists to improve their wealth (Zarezadeh et al., 2011).
Meng, 2018, is an example of long-term financial planning. The cash or money that‟s used for saving and for
settling financial obligations. The internal cash resources come from the existing operating income and funds used
from the start of the year. The information in the Cash Flow Statement provides the methodology for assessing if the
company is spending appropriately, if it may be prejudicial to potential performance for the sake of current liquidity,
and if payments would be made to shareholders. The results indicate that exchanges operate where trade controls or
other legal restrictions exist in countries where these are not open to the general public.
A majority of the theses argued used the ADI Theory developed by Jensen and Meckling (1976). The Theory
focuses on separating the owner and management roles. In this context, Wei et al. (2014) evaluate how the degree of
company ownership structure relates to firm performance in Malaysia, including the performance of trading and
service firms. To calculate the dependent variables such as firm age, firm size, leverage, return on assets (ROA),
return on equity (ROE), and Tobin‟s Q, the researchers test these variables against managerial ownership structure
and Non-managerial ownership structure. This study looked at the trading and services sectors to assess job growth
in the Malaysian business market (5 years). The firm size, leverage, and Tobin‟s Q are linked with the degree of
ownership in a company.
Zakaria et al. (2014) conduct a study to analyze the effect of ownership structure on company performance of the
Malaysian listed Trading and Services firms by using a sample of 73 companies and obtained the data for ownership
within a period of five years (2005-2010), by measuring dependent variable in term of profitability, valuation,
growth and risk such as ROA, leverage, firm size and investment opportunities; and independent variable
Concentrated Ownership, Managerial ownership, Government ownership and Foreign ownership.

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The paper discusses the role of financial analysis in the evaluation of prices of securities on the stock exchange. The
findings reflect a negative relationship between the degree of financial leverage and the rate of working capital
turnover, but not between the degree of financial leverage and the price of these firms.
All investors in the AMS are expected to have a good understanding of financial analysis. To benefit from the
experience and skills of experts in financial analysis, the best investment decisions are made.
Zhai (2017) The analysis of financial variables‟ effect on the country‟s external net assets. The study of financial
causes, financial structure and financial opening on the different levels of growth of the country‟s external net assets.
Five country survey data spanning the 1980s to 2011. Financial integration and financial transparency promote
capital mobility, which can minimize capital mismatch, which in turn can contribute to capital outflow. Financial
integration has both benefits and drawbacks for developed countries, which includes enabling them to expand
economically.
Increase the productivity, creativity and reach of the financial system to meet people‟s demand for financial
solutions. Corporate governance studies were informed by the organization‟s perspective on how organizations can
handle agency conflicts. The Board of Management, the Audit Committee, the Board of Directors, and its
accountability mechanisms are responsible for the company‟s control environment. Furthermore, empirical studies
have shown that effective governance is not only necessary for reducing competition and the conflict between
agencies and managers but also for reducing risk exposure and thereby improving firm value. The CG is proposed as
the solution for the Agency‟s dilemma, which is the basis of the model of this study, and the CG has come to the
fore here as the solution to the Agency‟s dilemma.
An agreement between the parties will include clear incentives to ensure that the parties agree entirely and not
diverge. To make sure the desired result happens, the program will refund the monitoring and bonding fees. Issues
associated with the division of ownership and power are intimately associated with the regulation of human actions.
It follows that capital structure theory offers insight into agency issues. Jensen and Meckling analyze how the parties
involved are likely to behave.
Asymmetric knowledge is essential for the transfer of power between managers and shareholders because managers
often know more about the business than the external owners do. George Akerlof published in 1970 a paper on the
market in “lemons”, which is American slang for a cheap quality commodity (Akerlof, 1970). In the used car
market, the prospective buyer has almost always been a more educated party. If you‟re buying an ordinary car,
you‟ll pay more for it than the worth of a lemon. The seller of the poor used car is delighted to sell. In comparison,
owners of vehicles that have been used will not want to sell. As a result, there will be a few decent used cars
available at the auction. The bottom line is that used car sales will require special focus.
The “lemons problem” is often debated in economic circles. Buyers of financial assets or goods tend to be better
educated than sellers of those products. The value of a corporate bond reflects the average probability of default by
other bonds of similar issuers. Even though companies with a low default risk shouldn‟t want to sell bonds at a price
that they know is too low, it must be taken into consideration. Businesses that are strong are unable to borrow in the
market. In comparison, the safest offers to buy are shares. If bond investors know this, they would probably be more
likely to opt for more diversified investments. The bottom line is, the demand for corporate bonds is failing and
needs to be replaced.
The stock market has a secondary feature which is the sum of assets that the institution holds on behalf of each share
shows the value of each share after the shareholder invests in the business, so this value is incurred on the balance
sheet by an asset (Uddin, 2009). The rate of return on assets is the number of cents produced per dollar of assets
employed. As shown by their highest returns on investment, the project is more successful. Such ratios are used to
equate one business to another within a similar field. Because of this, institutions in some sectors are not interested
in assets since they are less valuable than other types of capital. The return on investment in a business is smaller
than many other businesses, and this makes the company less interested in assets. The increased value of their assets
shows that the business is becoming more profitable. As a result, the reduction in the return on assets often means a
decrease in profitability (Kabajeh et al., 2012). Therefore, this gives rise to the research gaps of this segment is listed
by Al Qaisi et al. (2016), who Investigate the impact of some factors on market stock prices such as Return on Asset
(ROA), Return on Equity (ROE), the Age of the Company, and the Size of the Company. There is a link between the
rate of return on assets, debt ratio, age of the company, and the size of the company and the stock price. The
relationship between financial numbers and the market price is not extensively analyzed from a commercial bank‟s
perspective. Sharif & colleagues (2015) Found the key factors influencing stock prices in Bahrain. The price-to-
book ratio, dividend yield, price to earnings, and firm size are some of the main factors that decide to share prices in
the Bahrain market.

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The directors and shareholders are willing to take steps to ensure that the company doesn‟t go bankrupt (Gitman and
Zutter, 2012). Financial debt ratios assess the degree of financial risk a corporation is taking on. When a business
has a lot of debt, it appears to have a lot of financial risks. A corporation with higher debts and financial
commitments is more likely to struggle to repay its debts (Gitman and Zutter, 2012). Therefore, Zelgalve &
Berzkalne (2015), Equity return review, current ratio, and Baltic listed companies‟ market-to-book ratio.
To evaluate the regression between distinct debt ratios and profitability, the study used panel data. Menon (2016)
Measures the relationship of the Muscat Securities Market‟s listed companies between capital structures and share
prices. The addition of debt to total capital has an inverse impact on share prices.

Fama and French (1992) find that the critical CAPM forecast, a linear cross-sectional relationship between mean
excess returns and market factor exposures, violates exposures to two other variables, a size-based factor and a
book-to-market factor, also referred to as a “value” factor, explaining a large portion of the cross-sectional
dispersion in mean returns. If stocks are rationally priced, therefore, there should be systemic differences in average
returns due to risk differences. The market, size and value exposures must therefore proxy for vulnerability to
pervasive risk factors in returns, provided reasonable pricing.

A wide range of factors with a predominance of the company‟s results that have released the shares and a much
broader viewpoint where market forces are extremely relevant will influence share prices. As a consequence of these
market powers, stock prices change on a regular basis. The Theory that share prices change due to a change in
supply and demand for the company‟s shares can easily explain the market forces‟ effect. When more people are
interested in buying than selling, there is a rise in demand for that particular share. In such a case, prices increase.
On the other hand, if more people decided to sell a stock than to purchase it, supply would be higher than demand,
and the price would decline. Again, the psychological factors of the purchasing public can also influence demand
and supply.

Welch (2006) also points out the flaws in empirical analyses of the capital structure in which low debt ratios are
used. This author also underlines that the ratio „(long-term financial debt + short-term liabilities) / total assets‟ is
used in many empirical studies of capital structure. This ratio closely reflects‟ total liabilities / total assets and is not
acceptable to use to illustrate the company‟s correct capital structure because short-term liabilities include non-
interest-bearing debt. Once again, it can be mentioned that overestimated financial leverage would result from the
implementation of this ratio. Ramsharan (2019) Discusses the obstacles an investor faces as a result of interest rate
adjustments. The relationship of cash flow to market price performance is not discussed in the sense of commercial
banks. Osaseri1 & Osamwonyi (2019) discusses the development of the stock market, and economic growth in the
BRICS, from the World Bank Indicator, quarterly time series data for 1994QI to 2015Q4. Examines stock market
development and economic growth in the BRICS, data from the World Bank Indicator for the quarterly time series
for the period 1994QI to 2015Q4.

This article aimed to decide that the earnings or cash flows are best as a success metric, AL-Khadash, (2005). In
many recent US reports, in which earnings and cash flows are viewed as competing variables, he follows the more
straightforward approach. In particular, his methodology is an evolution of the Dechow analysis (1994). He offers
replication of her crucial study and then extends this to deal with the impact on the value importance of cash flow
and earnings of earnings permanence, earnings growth and firm scale. His research offers proof of the importance of
investors‟ cash flow estimates to their investment decisions in an emerging stock market. Some essential words used
in the stock market have been listed by Jim Berg (2011). In order to offer a clear idea before joining the investment
or attempting to learn about the market, the most commonly used words were clearly described in the paper. The
language in the business is harder to grasp. So we have adopted some words in our paper with the aid of this post.
We may have learned about the word arbitrage often, which means seeking a better market with relative advantages.
In the paper, there are some such words used that can help understand the market.

Md. Md. In his paper “Relation between Interest Rate and Stock Price: Empirical Evidence from Developed and
Developing Countries,” Gazi Salah Uddi (2009) mentions the relationships between interest rates and the stock
market. The purpose of the paper is to define the relationship between the interest rate and share prices. The interest
rate changes have apparent impacts on the economy, so it is necessary to know the relationship to reduce market
risks and understand monitoring policy and fiscal policy.

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Method
Research Strategy

This critical review lists the comprehensive inclusion/exclusion criteria; the core framework, however, is the
following:

1- Assess the role of entrepreneurial incubators and innovation of the topic against the concern raised
in the research question (i.e. developing countries).
2- Creating a trend and connections between the literature available (i.e. identifying the most
common factors and relevancy to the topic innovation in the developing countries).

In determining the study path, selecting the research methodology is essential, as it directly affects answering the
research question (Johnson & Clark, 2006).

3.1. Research Design

This analysis is focused on secondary data and the compilation and examination process of qualitative research. As
they save time, these were considered to be more fitting for the nature of this research. The qualitative approach will
also help evaluate the various findings and creativity and clarify incubators in emerging markets. Though objective,
secondary data would not be able to describe human behaviours.
The procedure followed to gather data for the research is the Systematic Literature Review. A specific research
issue, intent, and goals were described in this study. Therefore, the Systematic Literature Review was chosen as an
effective method to ensure the validity, adequacy, and accuracy of the data obtained and minimize any personal
biases and errors.
Also, the researcher produces consistent guidelines for defining the relevant literature by using the Systematic
Literature Review, which can help address the particular research question. Only the literature identified to be
specifically relevant to the different research question segments will be used after following these criteria.
For this review, the following inclusion/exclusion requirements are adhered to in the relevant literature:

Inclusion Criteria Exclusion Criteria

Theme In the variables and their Non-innovative issues related to SMEs
relationships, scope
Country/Region Developing countries Developed countries
Industry Banks Non-Banks
Affected industry Innovation from entrepreneurs and All other innovation sources
incubators
Time horizon Academic literature (Articles) Academic literature (Articles) outside the
between 2010-2021. years 2010-2021.

3.3. Research Approach

This research applies evidence from the literature to business incubators and innovation concerning obstacles in the
emerging markets. This will help to explain the strategies and the relations and trends between the data collected.
Although this analysis does not attempt to validate a theoretical argument, the study will adopt the Inductive Method
as such.

Research Strategy
Archival Research will follow the report‟s research approach, as the study will seek a compilation of past study
knowledge and written documents to address the research question. Grounded Theory would also be accompanied
by illustrating the abandoned trends of cashflow and stocks in emerging markets by applying the chosen Theory. For
this research, observation and ethnography were determined to be unsuitable because they depend on data collected
from primary data to allow patterns to be observed and identified within a particular sample.

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Data Collection
The research engines to be utilized are Scopus, Emerald Insight, Research Gate, and Google Scholar. They were
selected for their ease of accessibility and their reliable repository of literature.
During the research process, it is anticipated that the following keywords will be used to locate relevant articles.
Conclusion
Various studies have been carried out to explore the effects of ownership structure effects on company performance
globally, such as Demsetz and Villalonga (2001) conducting research to investigate the relationship between the
ownership structure and corporate performance if ownership is made multi-dimensional and viewed as an
endogenous variable. It explores the positions played by two facets of the system of ownership, the share fraction
owned by the five largest shareholding interests and the share fraction owned by management. Two hundred twenty-
three firm random subsamples from Demsetz and Lehn (1985) were used for previous studies from 1976-1980 and
1980-19811. (5 years). The business performance-based variable calculated by Tobin‟s Q, profit rate, advertising-to-
sales ratio, R&D to sales ratio, fixed asset-to-sales ratio, market risk, company-specific risk, the concentration of
ownership, shareholdings of management, assets, debt-to-asset ratio and management of industry.

Financial markets and their dynamics are very complex, and different methods and approximations are needed for
their description. We are developing methods, models, and equations in this paper that treat financial variables,
market transactions, and expectations as risk functions.

Through its contribution to aggregate demand and its ties to the banking system and capital markets, the financial
role of the corporate sector can influence the performance of the real economy and the stability of the financial
system. For both the macroeconomic conditions of a country and the stability of its financial system, the financial
performance and financing decisions of firms, as well as their responses to financial pressure, are significant. Thus,
for example, excessive indebtedness can adversely affect investment expenditure or cause sharp portfolio switching
in the face of an unexpected shock (Hernando and Martínez-Carrascal, 2019).

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