Capital Structure and Firm Performance: Evidence from Ghana Stock Exchange

Abstract

The study examined the relationship between capital structure and firm performance, using secondary data. It covered all the 35 listed companies in accordance with the Ghana Stock Exchange (GSE) Fact Book 2009 over the period 2004 to 2008. Return on equity (ROE), return on assets (ROA) and return on total capital (ROTC) were used as explanatory variables. Capital structure was represented as short term debt (STD), long term debt (LTD) and total equity (TE). Three multiple regression models were utilized; hence series of regression analysis were executed for each model. Observations were that; STD, LTD, and TE respectively account for 8.6% of the variations of return on equity, 0.5% of the variations of return on assets and 3.2% of the variation of return on total capital. Important observed patterns in financing structure were: STD 52%, LTD 9% and EQUITY financing 39%. This has reemphasized the fact that listed companies are highly levered, and also highlights the importance of short-term debts over long-term debts in the financing of companies in Ghana. For every cedi of company financing in Ghana, listed companies employed 0.52pesewas of STD in financing their operations and for every cedi of company financing, listed companies during the study period employed 0.09 pesewas of LTD in their operations, but 0.39 pesewas of equity in financing their operations. This is so because the market for long term debt is not well developed in Ghana. The study observed that STD and TE have a significant positive relationship with ROE, ROA and ROTC but LTD has a significant negative relationship with ROE, ROA and TE.

Keywords: Capital structure; performance; long term debt; short term debt; Ghana Stock Exchange, Sustainable development.