Evaluating the Moderating Effect of Firms' Size on the Relationship between Debt Financing and Financial Performance of Firms Evidence from Egypt

Abstract

The influence of the macroeconomic variables on the stock market performance have been the core center of the theoretical and empirical investigations. In particular the capital movements have made the macroeconomic variables specifically the exchange rates one of the fundamental determinants of the stock performance. Recently increasing the international diversification, gradual abolishment of capital inflow barriers, foreign exchange restrictions or adoption of flexible exchange rate limitations have increased the investment opportunity in the emerging countries (Mahfoudh, 2012). The relationship between the macroeconomic variables and the stock market performance would have an implication on the economic policies and the capital budget, since any negative economic shocks will be reflected on the stock market return. It will also help public authorities to build successful strategies and take the right decisions towards their monetary policy. The expected return is sentient to the economic performance. The sensitivity of the emerging countries is due to the different legal economic legislations and institutional restrictions. Theoretically, many theories attempt to illustrate the relation between the macro- economic variables and the exchange rate. The arbitrage pricing theory (APT) developed by (Stephen Ross, 1976) stated the asset pricing model was based on the idea that asset's return can be predicted using the relationship between the portfolio returns and the return of a single asset through a linear combination of many independent macroeconomic variables. Macroeconomic variables are defined as a branch of economics that influence the performance, structure behavior and the decision making of the whole economy (Akers, 2001), the APT failed to specify the macroeconomic factors that impact on the exchange rate (Fabozzi,2015). While Ross (1987) attempt to illustrate the influence of four factors: investor confidence, inflation, gross domestic product, and shift in the yield curve; they endorsed that the APT shouldn’t be limited to these factors. The economic theory assumes the significant variables in understanding the behavior of the stock prices predicting the various trends and movements in the exchange rates including interest rates, inflation rate, money supply and price level.