Does Modigliani and Miller Relevance and Irrelevance Theory of Capital Structure Apply Among Non – Finance Quoted Companies in Ghana?

Abstract

This study tests the applicability of Miller and Modigliani relevance and irrelevance theories for a set of 15 companies in Ghana using that for the period 2010 to 2019. The test procedure invoved examining how debt to equity ratios affect the value of the firms in the market, including how tax shield provided from debt accumulation improves the firms’ value. The result from the empirical analysis shows that neither the irrelevance nor the relevance theory is prevalent among the quoted firms in the non-finance sector in Ghana over the reference period. Empirical evidence also indicate that debt structure does not infleunce firm value (that is, the use of long term or short term debt pattern does not matter for firm value) among the sampled firms. The result also shows that debt to equity ratio does not influence firm performance. Moreover, tax shield from use of debt is shown to have no significant influence on the changes in firm value STATA computer econometric software package. The estimation was carried out using the Stata 13.0 statistical software.