The Impact of Capital Structure on Profitability of Banks Listed on the Ghana Stock Exchange

Abstract

The purpose of this paper is to examine the impact of capital structure or leverage on profitability of listed banks stock exchange Ghana from 2007 to 2013. The concept of capital structure in finance explains the way a firm finances its assets/operations by the use of a blend of debt and equity. The blend of debt and equity would make banks more profitable bearing in mind the adverse effect of the extreme of each form of financing. Data was collected from Ghana stock exchange and the annual reports of the17 listed banks. Descriptive statistics and multiple regression models were used to analyze the data.  The result revealed that the banks listed on the Ghana Stock Exchange are highly geared. This can be attributed to their over dependency on short term debt which is due to the relatively high Bank of Ghana Lending rate and low level of bond market activities. The study showed that financial leverage measured by short term debt to total assets (STDTA) had significant positive relationship with profitability measured by return on assets (ROA), return on equity (ROE) and earnings per share (EPS). Long Term Debt to Total Asset (LTDTA) also had a significant positive relationship with ROA and ROE but however, had a negative and insignificant relationship with EPS. Asset growth rate had a negative and insignificant relationship with profitability measured by ROA, ROE and EPS. Firm size also showed positive and significant relation with all the profitability measures such as ROA, ROE and EPS.

Keywords: Capital structure, Profitability, Multiple regression, Ghana stock exchange, Bank of Ghana.