The Impact of Capital Structure on the Financial Performance of Energy Companies in Saudi Arabia
Profit is the primary objective of any business undertaking. The success or failure of any strategic corporate decision is evaluated mainly based on its impact on profitability. Any decision which a negative impact on profitability will have has to be abandoned. Profitability has been given considerable importance in finance related research. The firm can finance its assets either through debt or equity. But the mix of both would be the best choice.
The 1973 crisis began when the Organisation of Arab Petroleum Exporting Countries, in response to the involvement of the United States in the Yom Kippur war, launched an oil embargo against Canada, The United States, Japan, The United Kingdom and The Netherlands, creating an increase of the oil barrel price by 400%, from 3 USD to 12 USD. The crisis began on the Oct 6, 1973 and lasted six months until March 1974. This price fluctuation was dealt with different measures by countries, companies and even whole industries. For example, Japan began distancing itself from oil-intensive industries, The United States began auditing their production capacities and the world’s automotive industry began producing more fuel-efficient cars. The second oil shock started in 1979 and was the result of the Iranian revolution, when the Shah of Iran, Mohammad Reza Pahlavi, was forced in exile and the Ayatollah Khomeini became the new leader of Iran.
Most governments have a commitment to improvement of the international trade in an effort to improve the economic growth rate. They enhance international trade by ensuring fair trade and compliance with international trade laws and regulations. The governments also support industries such as Saudi ARAMCO to develop sufficiently in the international markets in the aim of meeting growing demands. Saudi ARAMCO has an integration of the logistics required for the formation of a link between productions, distribution and warehousing to work as a single entity for the oil and gas products. The concept of a whole supply chain is evident in the company, which makes it agile enough to be in a position of meeting demands, the growing competition and the dynamism in the industry (Chopra and Meindl 237).In some cases, firms intending to undertake foreign direct investment are required to form partnerships with other private or public firms in the host countries (Wisner, 10). This limits the operational efficiency of the firm. Formation of free trade agreements eliminates barriers related to foreign direct investment.
Definitely, the Saudi Electricity Company needs to expand its size to reach the optimal output level. The third chapter investigates the impact of the overall financing activities on economic growth in Saudi Arabia. The study developed a financing index that takes into account the overall available credit in Saudi Arabia. The index was shown to be sensitive to economic and political shocks such as the Arab Spring. Using Johnson cointegration approach, the paper found an evidence of a long run relationship between real GDP per capita, financing, real interest rate, public labor force, and capital. Using a vector error correction model, the paper found a robust estimate that proves the positive impact of financing on economic growth in Saudi Arabia. Furthermore, the Granger-Causality Wald test indicates that financing influences economic growth in Saudi Arabia.
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