The Impact of Capital Structure Decisions on Firm Performance: The Case of Listed Non-Financial Institutions in Ghana

Abstract

The study examined the effect of firm capital structure decisions on their performance based on a sample of non-financial firms. The results of the study show that capital structure decisions thus affect firms’ performance significantly. The study sampled 20 listed firms on the Ghana Stock Exchange over a 7 year period from 2010 to 2016. The study used both equity ratios and leverage ratios to measure capital structure. In all the regression results, the leverage variables were inversely related to performance. Short-term debt to equity which was expected to be positively related to performance is equally negatively related. The argument for short-term debt being positively related is due to the fact that such funds are generally cheap and easily accessible. However, the significance of such decisions on performance is mostly observed on equity holders. Thus, the return on equity as a measure of performance is significantly impacted by capital structure decisions. This is true regardless of the financial leverage variable observed, be it short-term debt, long-term debt or total debt. This, therefore, suggests that managements’ decision regarding how much debt to be employed in a business is constantly made with shareholders being the revolving factor.