Short Term Financial Leverage and Shareholders’ Wealth Maximisation of Ghanaian Banks: New Theoretical Evidence

Abstract

This paper investigated the effect of short term financial leverage on shareholders’ wealth maximisation of Ghanaian banks. The objective of this paper was to determine that the traditional capital structure theories are limited to explaining the causal role of short term leverage. The study first estimated assumed minimum and maximum proxies for measuring short term financial leverage and investigate the effect of these proxies on shareholders’ wealth. The paper argued that to the extent that capital structure definition encompasses short term debt, some theoretical assumptions of the traditional theories should be relaxed and policy directions uniquely formulated for each component of capital structure. The study uses secondary data from 2004-2014 and estimated the relationship using panel ordinary least square estimation technique after the relevant econometric considerations are tested. The paper revealed that both minimum mean proxy and maximum mean proxy of short term financial leverage positively affect shareholders’ wealth, however, the minimum mean proxy was insignificant. It was concluded that the higher the level of short term financial leverage, the more the wealth of shareholders of Ghanaian banks are maximised. It was also concluded that Ghanaian banks are not limited by the optimisation threshold even though the tax benefits may be minimal due to high interest rate spread on short term financial leverage. It is recommended that theoretical estimation of optimality should not be based on only the marginal benefits of tax and marginal cost of debt but also marginal earning power of the debt and industrial characteristics. Ghanaian banks should increase their coverage to deepen their customer bases to boost short term debt for the purpose of maximising shareholders’ wealth.

Keywords: Short term financial leverage, shareholders’ wealth, minimum mean proxy, maximum mean proxy and return on equity