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
Highlights
Corporate entities normally find it uneasy task in taking decisions regarding their capital structure: whether equity, debt or combination of both should be used to finance investment portfolios
The findings indicated that Ghanaian banks are highly leveraged with debt financing representing 84% of total capital and short-term debt representing 77%
He further supported the fact that Ghanaian banks are highly geared with debts comprising 87% of entire capital used in financing total assets; with short term debt representing more than 75% of banks’ total capital
Summary
Corporate entities normally find it uneasy task in taking decisions regarding their capital structure: whether equity, debt or combination of both should be used to finance investment portfolios. The theory capitalizes on assumptions of tax-free economy, absence of transaction and bankruptcy coast as well as the existence of efficient capital markets They concluded that the firm’s value is not dependent on its capital structure; finance managers do not need to worry about the proportion of equity or debt to be used to finance their operations. It was concluded that profitability, corporate tax, growth, assets’ structure and bank size influence financial decisions of banks He further supported the fact that Ghanaian banks are highly geared with debts comprising 87% of entire capital used in financing total assets; with short term debt representing more than 75% of banks’ total capital. Correlational and multiple regression analyses were the main quantitative approaches used in examining the relationships among variables included in this study
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