The Effect of Capital Structure on Performance of Banks in Ghana: Evidence from Listed Banks on Ghana Stock Exchange

Abstract

Capital structure decisions are still debatable issue in corporate finance literature. The issue has been whether capital composition of debt and equity is relevant; and if relevant, whether optimal capital structure exists. Whilst some scholars have empirically supported positive association between capital structure and firms’ performance, others have concluded an inverse relationship. Therefore, it is of great importance for managers to abreast themselves with modern theories and empirical findings available in order to serve as a guide when taking financial decisions on whether to source funds internally or externally to finance investment projects. The main object of the study is to investigate whether relationship exists between capital structure (measured in terms of short-term debt to total asset and total debt to total asset) and listed banks’ performance (measured in terms of earning per share) based on data gathered from 2010 to 2019. Balanced panel data was analyzed through the use of descriptive statistics, correlation analysis and Ordinary Least Square (OLS) regression analysis. The findings revealed a highly leveraged Ghanaian banks; with short term debt and total debt forming 71.57% and 85.19% of total assets respectively. It was also revealed further that capital structure has statistically significant association with banks’ performance. However; short term debts showed a positive relationship or correlation with performance whist total debt and performance exhibited an inverse correlation with performance. The findings would serve as a guide to bank managers when making financial decision on capital structure.

Keywords: Capital Structure, listed banks, Ghana Stock Exchange, Performance, Ghana.

DOI: 10.7176/RJFA/12-8-05

Publication date: April 30^th 2021