Determinants of Capital Structure of Insurance Companies in Ghana

Abstract

This study investigated the determinants of capital structure of insurance companies in Ghana. The study employed panel regression model in examining the capital structure of insurance companies in Ghana with financial statements of twelve insurance companies covering the period, 2002-2007.The results show that both the static trade-off and pecking order theories are important in explaining the capital structure of insurance companies in Ghana. Firm size, profitability and growth were statistically significant in relation to leverage. The positive relationship between firm size and leverage is an indication that, large insurance companies tend to employ more debt in their capital structure. This is because they are more diversified and have less probability of bankruptcy. The negative relationship between profitability and leverage is an indication that profitable insurance companies prefer internal sources of finance to external sources, hence less debt in their capital structure. However, the positive relationship between growth and leverage proves that growing insurance companies depend more on debt to finance their growth. These are very important variables influencing the financing decisions of insurance companies in Ghana. The other firm level variables were statistically insignificant.

Key words: Capital Structure, Insurance companies, Ghana