The Effect of Activity-Based Costing on Companies' Financial Performance: A Study among Palestinian Non-Financial Shareholding Companies

This study evaluates how adopting Activity-Based Costing (ABC) affects firm-level financial performance, and whether the effect differs across three profitability ratios (operating-profit margin, net-profit margin, and return on equity). It addresses mixed evidence on ABC effectiveness by focusing on an under-explored setting: Palestinian non-financial companies. A balanced panel of 30 Palestine-Exchange-listed firms (2014 – 2023; 300 firm-year observations) is analyzed. ABC use was confirmed through structured telephone interviews with CFOs, focusing on formal adoption and year of implementation. Multiple linear-regression models with robust error control for firm size, sales-growth, and industry; year dummies mitigate macro shocks. ABC adopters outperform non-adopters. Adoption lifts operating-profit margin by 16 percentage points, net-profit margin by 9 points, and return on equity by 24 points—all significant at 1 per cent. Results remain stable under alternative profitability specifications. Cost-system change alone does not guarantee higher profits; however, when ABC is fully instituted, it sharpens cost visibility, redirects resources, and boosts margins. Managers in resource-constrained environments should pair ABC roll-outs with training and digital support to unlock these gains. Findings extend cost-management, resource-based-view, and stakeholder theories by showing that enhanced cost transparency operates as a strategic resource that converts into measurable financial returns, particularly in economies facing political and market frictions. This study delivers the first large-sample, empirical evidence on Activity-Based Costing among firms listed on the Palestine Exchange and stands among the very few from the broader MENA region. Through detailed profitability breakdowns and direct executive-level verification of ABC implementation, it provides context-sensitive insights into the conditions under which ABC adoption drives firm-level financial performance.