The Effects of Capital Structure on Profitability of Listed Firms in Ghana

Abstract

The study investigated the relationship between capital structure and profitability of listed firms in Ghana during the five year period from 2005 to 2009.  Literature review on the relationship between the firms’ profitability and capital structure showed that there is either a positive, negative or neutral relationship between profitability and capital structure. It also showed there is no conclusive evidence of what should be the optimal capital.  Regression analysis was used to investigate the relationship between capital structure and profitability. Also, average profitability and debt ratios were used to determine whether Ghanaian listed firms depended on debt or not.

Similar to Abor (2005) study, the results revealed that, there is a statistically significant positive relationship between profitability and short term debt and a significantly negative relationship between profitability and long term debt. However, the results revealed a statistically negative relationship between profitability and total debt contrary to Abor (2005) study. The results also revealed that, Ghanaian listed firms relied more on short term debt than long term debt. The average short term debt to total capital ratio was 52% and long-term debt to total capital ratio was 11%.