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Multifactor Capital Asset Pricing Model in the Jordanian Stock Market Mohammad Kamel Elshqirat Walden University

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Multifactor Capital Asset Pricing Model in the Jordanian Stock Market Mohammad Kamel Elshqirat Walden University Walden University ScholarWorks Walden Dissertations and Doctoral Studies Walden Dissertations and Doctoral Studies Collection 2018 Multifactor Capital Asset Pricing Model in the Jordanian Stock Market Mohammad Kamel Elshqirat Walden University Follow this and additional works at: https://scholarworks.waldenu.edu/dissertations Part of the Finance and Financial Management Commons This Dissertation is brought to you for free and open access by the Walden Dissertations and Doctoral Studies Collection at ScholarWorks. It has been accepted for inclusion in Walden Dissertations and Doctoral Studies by an authorized administrator of ScholarWorks. For more information, please contact [email protected]. Walden University College of Management and Technology This is to certify that the doctoral dissertation by Mohammad Kamel Elshqirat has been found to be complete and satisfactory in all respects, and that any and all revisions required by the review committee have been made. Review Committee Dr. Mohammad Sharifzadeh, Committee Chairperson, Management Faculty Dr. Robert DeYoung, Committee Member, Management Faculty Dr. Craig Barton, University Reviewer, Management Faculty Chief Academic Officer Eric Riedel, Ph.D. Walden University 2018 Abstract Multifactor Capital Asset Pricing Model in the Jordanian Stock Market by Mohammad Kamel Elshqirat MA, Hashemite University, 2007 BS, University of Jordan, 1998 Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy Management Walden University May 2018 Abstract A valid and accurate capital asset pricing model (CAPM) may help investors and mutual funds managers in determining expected returns and thus, may increase profits which can be reflected on the community resources. The problem is that the traditional CAPM does not accurately predict the expected rate of return. A more accurate model is needed to help investors in determining the intrinsic price of the financial asset they want to sell or buy. The purpose of this study was to examine the validity of the single-factor CAPM and then develop and test the validity of a multifactor CAPM in the Jordanian stock market. The study was informed by the modern portfolio theory and specifically by the single-factor CAPM developed by Sharpe, Lintner, and Mossin. The research questions for the study examined the factors that may explain the variation in the expected rate of return on stocks in the Jordanian stock market and the relationship between the expected rate of return and factors of market return, company size, financial leverage, and operating leverage. A causal-comparative quantitative research design was employed to achieve the purpose of the study by testing the listed companies on the Amman stock exchange (ASE) for the period from 2000 to 2015. Data were collected from the ASE database and analyzed using the multiple regression model and t test. The results revealed that market return, company size, and financial leverage are not predictors of the expected rate of return while operating leverage is a predictor. The results of this study may contribute to positive social change by changing the way the individual investors and mutual funds managers select their investing portfolios which can lead to better resource distribution in the economy. Multifactor Capital Asset Pricing Model and the Jordanian Stock Market by Mohammad Kamel Elshqirat MA, Hashemite University, 2007 BS, University of Jordan, 1998 Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy Management Walden University May 2018 Dedication This dissertation is dedicated to my mother and father who spent most of their life and money in helping me and my brothers to complete our education. Special dedication is to my father who spared no effort to provide me with medical treatment after I suffered from a serious injury when I was a child. I am thankful for all my brothers who supported me during my study. My thanks also go to those people who treated me bad during my career because they pushed me to work harder and prove myself. Acknowledgments I am grateful for Walden University and for all of its faculty members and staff. I want to thank all faculty members of management for everything I learned from them during my coursework. Special thanks go to Dr. Sharifzadeh for accepting to be my chair and for all of his recommendations and directions. In addition, I want to thank Dr. DeYoung, my committee member, for his helpful recommendations on my writing. Finally, I am thankful for all Jordanian agencies that provide the public with data about the Jordanian economy and stock market. Table of Contents List of Tables .......................................................................................................................v List of Figures ................................................................................................................... vii Chapter 1: Introduction to the Study ....................................................................................1 Background of the Study ...............................................................................................2 Problem Statement .........................................................................................................5 Purpose of the Study ......................................................................................................6 Research Questions and Hypotheses .............................................................................6 Research Questions ................................................................................................. 6 Research Hypotheses .............................................................................................. 7 Theoretical Foundation ................................................................................................12 Nature of the Study ......................................................................................................14 Definitions....................................................................................................................15 Assumptions .................................................................................................................17 Scope and Delimitations ..............................................................................................19 Limitations ...................................................................................................................20 Significance of the Study .............................................................................................20 Significance to Theory .......................................................................................... 20 Significance to Practice......................................................................................... 21 Significance to Social Change .............................................................................. 22 Summary and Transition ..............................................................................................23 Chapter 2: Literature Review .............................................................................................25 i Literature Search Strategy............................................................................................26 Literature Review through Annotated Bibliographies .......................................... 26 Libraries, Databases, Search Engines, and Search Terms Used ........................... 26 Scope of the Reviewed Literature ......................................................................... 27 Capital Asset Pricing Model ........................................................................................28 Theoretical Analysis of CAPM ............................................................................. 28 CAPM Extensions ................................................................................................. 42 Arbitrage Pricing Theory .............................................................................................44 Empirical Tests of CAPM ............................................................................................46 Size, Operating Leverage, and Financial Leverage .....................................................47 Summary and Conclusions ..........................................................................................49 Chapter 3: Research Method ..............................................................................................52 Introduction ..................................................................................................................52 Research Design and Rationale ...................................................................................52 Methodology ................................................................................................................54 Population and Sampling Procedures ................................................................... 54 Pilot Study ............................................................................................................. 56 Data Collection ..................................................................................................... 57 Study Variables ............................................................................................................57 Study Hypotheses.........................................................................................................60
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