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Capital Structure and Firm Performance: Evidence from Ghana
Stock Exchange

,ric Atta A""iad-ei
.hana /echnolog0 1ni2ersit0 3ollege) !45 1** Accra .hana
3ontact Address6 ,ric Atta A""iad-ei) !.&. 5o7 1++%% 8u9asi-.hana
ea""iad-ei:gtuc.edu.gh ericaa+1+%:0ahoo.co.u;

Abstract
/he stud0 e7a9ined the relationshi" <etween ca"ital structure and fir9 "erfor9ance) using secondar0 data. It
co2ered all the +( listed co9"anies in accordance with the .hana Stoc; ,7change .S,# Fact 5oo; 2**9 o2er
the "eriod 2**% to 2**$. Return on e=uit0 R&,#) return on assets R&A# and return on total ca"ital R&/3#
were used as e7"lanator0 2aria<les. 3a"ital structure was re"resented as short ter9 de<t S/>#) long ter9 de<t
?/># and total e=uit0 /,#. /hree 9ulti"le regression 9odels were utili@edA hence series of regression anal0sis
were e7ecuted for each 9odel. &<ser2ations were thatA S/>) ?/>) and /, res"ecti2el0 account for $.6B of the
2ariations of return on e=uit0) *.(B of the 2ariations of return on assets and +.2B of the 2ariation of return on
total ca"ital. I9"ortant o<ser2ed "atterns in financing structure were6 S/> (2B) ?/> 9B and ,C1I/D
financing +9B. /his has ree9"hasi@ed the fact that listed co9"anies are highl0 le2ered) and also highlights the
i9"ortance of short-ter9 de<ts o2er long-ter9 de<ts in the financing of co9"anies in .hana. For e2er0 cedi of
co9"an0 financing in .hana) listed co9"anies e9"lo0ed *.(2"esewas of S/> in financing their o"erations and
for e2er0 cedi of co9"an0 financing) listed co9"anies during the stud0 "eriod e9"lo0ed *.*9 "esewas of ?/>
in their o"erations) <ut *.+9 "esewas of e=uit0 in financing their o"erations. /his is so <ecause the 9ar;et for
long ter9 de<t is not well de2elo"ed in .hana. /he stud0 o<ser2ed that S/> and /, ha2e a significant "ositi2e
relationshi" with R&,) R&A and R&/3 <ut ?/> has a significant negati2e relationshi" with R&,) R&A and /,.
Ke!ords6 3a"ital structureA "erfor9anceA long ter9 de<tA short ter9 de<tA .hana Stoc; ,7change) Sustaina<le
de2elo"9ent.

"# $ntroduction
/he ter9 capital structure refers to the 2arious 9eans of financing a co9"an0. It is the 9i7 of long ter9 sources
of funds such as de<enture) long ter9 de<t) and "reference and e=uit0 share ca"itals. It is therefore used to
re"resent the a""ro"riate relationshi" <etween de<t and e=uit0. &ne crucial issue confronting 9anagers toda0 is
how to choose the co9<ination of de<t and e=uit0 to achie2e o"ti9u9 ca"ital structure that would 9ini9i@e the
fir9Es cost of ca"ital and i9"ro2es return to owners of the <usiness >adson et al 2*12#. /he a""ro"riate
co9<ination of de<t and e=uit0 that will 9ini9i@e the fir9Es cost of ca"ital and 9a7i9i@e the fir9Es
"erfor9ance and 9ar;et 2alue is the o"ti9u9 ca"ital structure. Finance 9anager do not ha2e a clear cut
guideline to <e consulted when ta;ing decisions regarding o"ti9al ca"ital structure. /his o"ti9u9 ca"ital
structure co9<ination in "ractice rest on the a2aila<ilit0 and cost.
&ne of the earliest co9"rehensi2e researches into ca"ital structure of <usiness fir9s was conducted <0
the No<el !ri@e winners 4odigliani and 4iller 4F4# in 19($. /he0 argued in their "ro"osition 1 that) gi2en
their ideal world) where there are no <an;ru"tc0 cost and frictionless ca"ital 9ar;et and a world without ta7es#
the 2alue of a fir9 do not de"end on the 9i7 of de<t and e=uit0. Accordingl0 de<t "olic0 of a fir9 does not
9atter) <ut the cash flows generated <0 the o"erating assets of the fir9 concerned.
/his conclusion in 4F4 "ro"osition 1is inconsistent with what "ertains in the real world of <usiness)
where ca"ital structure 9atters) so fir9s continue to <orrow. As a result) 4F4 in 196+ "ro"osition 11#
re2iewed their earlier "ro"osition to include ta7es and other 9ar;et i9"erfections such as costs associated with
trading in securities and contend that ca"ital structure 9atters and fir9s can reall0 9a7i9i@e 2alue <0 using
9ore de<t in their o"erations so as to ta;e ad2antage of ta7 shield <enefits of le2erage. 3ontri<uting to 4F4
19($ F 196+# stud0 on ca"ital structure) other theories of ca"ital structure ha2e e9erged.
&ne of such contri<utors is the ta7 shield school of thought. 3a"ital structure of the fir9 is e7"lained
in ter9s of the ta7 shield or <enefit associated with the use of de<t. .reen et al 2**2# es"oused the idea that ta7
"olic0 has an i9"ortant effect on the ca"ital structure decisions of fir9s. Nor9all0 the <asic ta7 laws allow fir9s
to deduct interest on de<t in co9"uting ta7a<le "rofits. /a7 ad2antages deri2ed fro9 de<t often lead fir9s to <e
co9"letel0 financed through de<t. Gowe2er) this "ro"osition should not entice 9anagers to <orrow to the hilt. It
is the trade-off that ulti9atel0 deter9ines the net effect of ta7es on de<t usage 4iller) 1977A 40ers) 2**1#. /hus
fir9 that can deri2e 9a7i9u9 <enefit fro9 de<t usage are those whose 9anagers can accuratel0 deter9ine the
"oint where the ad2antages of interest ta7 shield ends and where the cost of financial distress starts.
40ers 19$%# and 40ers and 4a-luf 19$%# in "ec;ing order theor0) contend that fir9s will alwa0s
resort to the chea"est source of funding to sti9ulate their o"erations. 40ers 19$%# argues that co9"anies will
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onl0 issue e=uit0 as a last resort when their de<t ca"acit0 has <een e7hausted. /he0 agreed that) there is a certain
hierarch0 of fir9 "references regarding financing of their in2est9ents. 1ndou<tedl0) fir9s would "refer internal
sources of funding to e7"ensi2e e7ternal finance 40ers and 4a-luf) 19$%#. /he0 concluded that co9"anies with
few in2est9ent o""ortunities and su<stantial free cash flow will ha2e low or e2en negati2e# de<t ratios <ecause
the cash will <e used to "a0 down the de<t. It also suggests that high-growth fir9s with lower o"erating cash
flows will ha2e high de<t ratios <ecause of their unwillingness to raise new e=uit0.
Following closel0 are the <an;ru"tc0 cost school of thought. 5an;ru"tc0 costs refer to the cost that
occurs when a fir9 fails to honor its de<t o<ligations and stand the "ossi<ilit0 of <eing closed down /it9an et al
19$%#. /he "otential costs of <an;ru"tc0 9a0 <e direct and indirect) A<or 2**$#. Fir9s that ha2e high distress
cost would ha2e incenti2es to decrease outside financing so as to lower these costs. Gence) the o"ti9al ca"ital
structure re"resents a le2el of le2erage that <alances <an;ru"tc0 costs and <enefits of de<t finance.
In .hana) few studies ha2e <een conducted to e7a9ine the deter9inants of ca"ital structure and
"rofita<ilit0) >adson et al 2*12#. None of the9 ha2e full0 <een directed at listed co9"anies on the .S,. A<or
2**7# co9"ared the ca"ital structure of =uoted fir9s) large un=uoted fir9s) and s9all and 9ediu9 enter"rises
S4,s# in .hana using "anel data regression. /he stud0 o<ser2ed that =uoted and large un=uoted fir9s e7hi<it
significant higher de<t ratios than do S4,s.
A<or 2**$# studied the lin; <etween cor"orate go2ernance and the ca"ital structure decision of S4,s
in .hana. /he stud0 sought to assess how the ado"tion of cor"orate go2ernance structures a9ong S4,s
influence their financing decisions <0 e7a9ining the relationshi" <etween cor"orate go2ernance characteristics
and ca"ital structure using regression 9odel. /he results suggested that S4,s "ursue lower de<t "olic0 with
larger <oard si@e. Gowe2er) S4,s with higher "ercentage of outside directors) highl0 =ualified <oard 9e9<ers
and one-tier <oard s0ste9 were o<ser2ed to e9"lo0 9ore de<t. Gis stud0 9ade it that cor"orate go2ernance
structures influence the financing decisions of .hanaian S4,s.
A9idu 2**7# de2ised a stud0 to in2estigate the deter9inants of ca"ital structure of <an;s in .hana
and found a significantl0 negati2e relation <etween total de<t and "rofita<ilit0
>adson and 5adu 2*12# in2estigated the relationshi" <etween ca"ital structure and "erfor9ance of
listed <an;s in .hana) using "anel data) the result re2ealed that <an;s listed on the .hana Stoc; ,7change are
highl0 geared and this is negati2el0 related to the <an;s "erfor9ance in ter9s of return on e=uit0 and /o<inEs =.
Fro9 the foregoing discussions <ased on the a2aila<le e9"irical literature) none of the studies conducted in
.hana e9"lo0ed all the listed fir9s for e9"irical anal0sis) to the e7tent that results fro9 in2estigations into the
relationshi" <etween ca"ital structure and "erfor9ance are also inconclusi2e) and re=uires 9ore e9"irical wor;)
gi2en the fact that research) technolog0 and inno2ation are the <edroc; for sustaina<le de2elo"9ent) this stud0
ai9ed at contri<uting to the de<ate on ca"ital structure and "erfor9ance of listed fir9s in an era where the
"ri2ate sector has <een ear9ar;ed as the engine of growth. It is e7"ected that the findings of this stud0 will ha2e
i9"ortant "olic0 i9"lications for .hanaian listed fir9s.

%# &ethodolog
/he stud0 anal0@ed co9"anies fro9 the si7 different do9inant sectors of .hanaEs ca"ital 9ar;et including6
Finance and Insurance) "a"er con2erters and infor9ation /echnolog0) 4anufacturing and /rading) Agriculture
and Agro "rocessing) 4etal and oil) and !har9aceuticals and 5e2erages s"anning fro9 2**% to 2**$. Secondar0
data was used and were collected fro9 audited financial state9ents as well as the fact <oo; of .hana stoc;
,7change. /he stud0 used ti9e series data. /i9e series anal0sis identifies the nature of "heno9enon
re"resented <0 the se=uence of o<ser2ation and forecast the future and o<ser2es a trend. /he ti9e series data
were anal0@ed using <oth =ualitati2e and =uantitati2e a""roach. 1sing =ualitati2e a""roach) a "attern in the data
set were ascertained. According to .u-arati) 2**%# e2er0 statistics to descri<e a data usuall0 su99ari@es the
content and dis"la0 the 9ean indicators of the 2aria<les used in the stud0. For =uantitati2e anal0sis) the stud0
therefore conce"tuali@ed ca"ital structure as a three di9ensional construct and for e9"irical "ur"osesA the linear
regression 9odel in esti9ating relationshi" <etween 2aria<les was used. ?inear regression is the least s=uares
esti9ator with e7"lanator0 2aria<les#. /he <asic regression e=uation was as shown <elow6
Y
it
=
i
+
1
X
it
+ u
it
(1)

Hhere6
'
it
is the 2alue of the de"endent 2aria<le D is what is <eing "redicted or e7"lained i.e. the "erfor9ance
2aria<les#
(
i
or al"ha) a constant e=uals the 2alue of D when the 2alue of IJ*#) that is ti9e in2ariantKs"ecific effects

"
or 5eta) the coefficient of I the slo"e of the regression lineA how 9uch D changes for each one-unit change
in I#.
)
it
is the 2alue of the inde"endent 2aria<le I# what is "redicting or e7"laining the 2alue of D) that is ca"ital
structure 2aria<les#
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*
it
is the error ter9A the error in "redicting the 2alue of D) gi2en the 2alue of I) or itEs a rando9 distur<ance it
is not dis"la0ed in 9ost regression e=uations#.

/he 4odigliani and 4iller 44# 9odel was ado"ted to ser2e as fra9ewor; for the 9odel de2elo"9ent.
/he0 argued that ca"ital structure was irrele2ant in deter9ining the fir9Es 2alue and its future "erfor9ance.
4odigliani and 4iller 196+# showed that their 9odel is no 9ore effecti2e if ta7 was ta;en into consideration
since ta7 su<sidies on de<t interest "a09ents will cause a rise in fir9 2alue when e=uit0 is traded for de<t.
4odigliani and 4iller 196+# argued that the ca"ital structure of a fir9 should co9"ose entirel0 of de<t due to
ta7 deductions on interest "a09ents. /o this end the 9ar;et 2alue of a fir9 is gi2en <06 Equity + Debt J Value
(i.e. E + D = V). /he o<-ecti2e of the 9anagers is the 9a7i9i@ation of the fir9Es 2alue i.e. of its share "rice.
>e<t finance is chea"er than e=uit0 finance r
d
< r
e
#) <ecause e=uit0 is 9ore ris;0 than de<t. /raditional theor0
"ostulated that if a fir9 su<stituteEs de<t for e=uit0) it will reduce its cost of ca"ital so increasing the fir9Es 2alue
is gi2en <0 e=uation 2.

r
a
=r
d
+ r
e
=r
e
-(r
e
-r
d
) (2)

Hhere6 r
a
J 2alue of the fir9A r
d
J cost of de<tA r
e
J cost of e=uit0) > J total de<tA , J total e=uit0

5ut) when the D/E ratio is considered too high) <oth e=uit0-holders and de<t-holders will start
de9anding higher returns so that the cost of ca"ital of the fir9 will rise. Gence) there e7ists an o"ti9al) cost
9ini9i@ing 2alue of the D/E ratio. 4odigliani- 4iller 4-4# "ro"osed that the 2alue of a fir9 is the sa9e
regardless of whether it finances itself with de<t or e=uit0. /he weighted a2erage cost of ca"ital6 r
a
is constant. In
the light of this) 4-4 assu9ed "erfect and frictionless 9ar;ets) no transaction costs) no default ris;) no ta7ationA
<oth fir9s and in2estors can <orrow at the sa9e r
d
interest rate. 5ase on 4-4 "ro"osition 2) the rate of retur o
equity !ro"# liearly "ith the debt ratio.
/his gi2en <0 e=uation +. Fro96 r
a
= ad r
e
= ($)
It follows that6 r
e
E=r
a
(E + D)%r
d
D (&)
Gence6 r
e
= r
a
+ (r
a
% r
d
) (')
4-4 indicated that the distri<ution of di2idends does not change the fir9Es 9ar;et 2alueA it onl0
changes the 9i7 of E and D in the financing of the fir9. /o this end) for a fir9 to decide an in2est9ent) a fir9
should e7"ect a rate of return at least e=ual to r
a
) no 9atter where the finance would co9e fro9. /his 9eans that
the 9arginal cost of ca"ital should <e e=ual to the a2erage one. /he constant r
a
is so9eti9es called the (hurdle
rate) the rate re=uired for ca"ital in2est9ent#.
It can <e infused that the 4-4 "ro"ositions are <ench9ar;s) not end resultsA in this res"ect financing
does not 9atter e7ce"t for 9ar;et i9"erfections or for costs i.e. ta7es# not e7"licitl0 consider. A hint that
financing can 9atter co9es fro9 the continuous introduction of financial inno2ations. If the new financial
"roducts ne2er increased the fir9sE 2alue) then there would <e no incenti2e to inno2ate. Non-uni=ueness of r
a
6
"erha"s it is not 2er0 i9"ortant. Since interests are considered as costs) a le2eraged fir9 has a fiscal <enefit. Its
o"erating earnings net of ta7es are gi2en <0 e=uation 66
X

=(1-t
*
)(X-r
d
D+rd D=(1-t
*
)X +t
*
r
d
D (+)
Hhile for an unle2eraged fir9 the0 are6 X

= (1-t
*
)X J net "rofits.
/he difference6 t
c
r
d
>) once ca"itali@ed at r
a
) 9a;es the 2alue of the le2eraged fir9 greater than that of
the unle2eraged <0 the a9ount6 At the li9it6 Lthe o"ti9al ca"ital structure 9ight <e all de<tM 4iller#.
5ut it is necessar0 to consider the "ersonal ta7ation of ca"ital gains) di2idends and interests that can "artiall0#
offset the fir9sE ta7 ad2antages. In the a<sence of offsetting) nothing would sto" fir9s fro9 increasing de<t in
order to decrease ta7ation. /here 9ust <e so9e costs to "re2ent aggressi2e <orrowing.

In 2iew of this) the single e7"lanator0 2aria<le linear e=uation was 9odified and transfor9ed into
9ulti"le regressions to anal0@e the stud0. /he full 9odel used for testing fir9Es "erfor9ance in relations to its
ca"ital structure is as follows6

D
1)2)+#)i)t
JN
i
O
1
I
1)i)t
O
2
I
2)i)t
O
+
I
+)i)t
Ou
i
7#

.u-arati 2**%# argued that the 9ain strength of using 9ulti"le regression is its a<ilit0 to 9easure the
-oint effect of an0 nu9<er of inde"endent 2aria<les u"on one de"endent 2aria<le. 4ulti"le regression 9odel is a
9odel in which a de"endent 2aria<le de"ends on two or 9ore 2aria<les. For e9"irical "ur"oses) the following
o"erationali@ation of ,=uation 7 is used.

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%*
R&/3
1))i)t
JN
i
O
1
S/>
)i)t
O
2
?/>
)i)t
O
+
/,
)i)t
Ou
i
$#
Hhere6 R&/3 J return on total ca"italA S/> J short ter9 de<tA ?/> J long ter9 de<tA /,J/otal
e=uit0A u
i
J error ter9
R&,
2)i)t
JN
i
O
1
S/>
)i)t
O
2
?/>
)i)t
O
+
/,
)i)
Ou
i
9#

In e=uation 9 and 1* the sa9e inde"endent 2aria<les are 9aintained e7ce"t the de"endent 2aria<le
which are R&, return on e=uit0# and R&A return on asset#.

R&A
+)i)t
JN
i
O
1
?/>
)i)t
O
2
?/>
)i)t
O
+
/,
)i)t O
u
i
) 1*#

2.1 Research Cuestions and G0"otheses
/his stud0 addressed two research =uestions. /he first descri<es the irrele2anc0 of ca"ital structure and fir9
"erfor9ance) i.e. do ca"ital structure decisions 9atters in fir9Es "erfor9ances in .hanaP A descri"ti2e 9ethod
was used to answer this first research =uestion.
/he second research =uestion deter9ines the e7tent to which the increase or decrease in ca"ital
structure affect fir9Es "erfor9ance) i.e. to what e7tent does the increase or decrease in ca"ital structure affect
fir9Es "erfor9anceP /o answer this second research =uestion) two h0"otheses were tested.
/hus) G0"othesis 1 is stated in the null and alternati2e for9s as follows6
G
*
6 /here is no significant relationshi" <etween a fir9Es "erfor9ance and ca"ital structure as 9easured <0 return
on assets) return on e=uit0 and return on total ca"ital.
G
a
6 /here is a significant relationshi" <etween a fir9Es "erfor9ance and ca"ital structure as 9easured <0 return
on assets) return on e=uit0 and return on total ca"ital.
/o in2estigate whether there has <een significant change in fir9Es "erfor9ance as a result of decrease or increase
in ca"ital structure. G0"othesis 2 is stated in the null and alternati2e for9s as follows6
G
2
6 /here is no significant change in fir9Es "erfor9ance as a result of increase or decrease in ca"ital structure.
G
2a
6 /here is a significant change in fir9Es "erfor9ance as a result of increase or decrease in ca"ital structure.

+# ,esults and -iscussions
+.1 >escri"ti2e Statistics
/a<le %.1 and %.2) shows the 9ean 2alue and standard de2iations of the 2aria<les under stud0) return on e=uit0
was a2eraged 1$B Std de2 J *.++# as co9"ared to R&A which is 6B std de2 J*.1%# and R&/3 of (B std de2
J *.11#. /his was the a2erage "rofita<ilit0 in res"ect of R&,) R&A and R&/3 9easures. /he high standard
de2iations 9eans that "rofita<ilit0 was not sta<le and co9"anies o"erated under se2ere ris;0 <usiness
en2iron9ent. /he "erfor9ance indicators also 9eans that as listed fir9s e9"lo0 de<t into its ca"ital structure the
return to e=uit0 will increase. /he higher "erfor9ance le2el of R&, 9ight ha2e <een contri<uted <0 ta7 shield of
interest and disci"linar0 role i9"osed <0 high short ter9 de<ts. /his i9"lies that 9anage9ent of fir9s can use
short ter9 de<t decisions to increase the return on the fir9. /his stud0 has o<ser2ed that co9"anies that e9"lo0
short ter9 de<t into their ca"ital structure 9a7i9i@ed their e=uit0 shareholders wealth) <ut will <e o"erating
under se2ere unsta<le condition de"icted <0 the standard de2iations of the 2arious "rofita<ilit0 9easures.
Furtherance to the a<o2e) fro9 ta<le %.1 listed co9"aniesE use of S/> a2eraged (2B in financing their
o"erations. Gowe2er) so9e 2ariations in the le2els of S/> were e9inent as indicated <0 the high Standard
de2iation of *.26. /his shows the le2el of reliance listed entities "lace on short ter9 de<t finance. Gowe2er) the
use of ?/> a2eraged 9B which was not astrono9icall0 de2iated as in S/> i.e. *.12#. An i9"ortant "oint that
was also noted is that +9B of the ca"ital structure of listed fir9s was e=uit0 with a standard de2iation of *.2+. In
the choice of their ca"ital structure) the stud0 also noted so9e insta<ilit0 as shown <0 the high standard
de2iations. /his stud0 has shown that listed entities do not rel0 9uch on ?/>) <ut on S/>. /his is so <ecause
the 9ar;et for long ter9 de<t is not well de2elo"ed in .hana) <ut it is eas0 to raise 9one0 in the 9one0 9ar;et
in the short ter9 <ecause of the unsta<le nature of the 9acroecono9ic en2iron9ent. Hh0 R&A is not
"erfor9ing well is "ro<a<l0 due to the fact that) listed co9"anies are hugel0 financed <0 S/>) it will <e 2er0
difficult for the9 to in2est in 2ia<le long ter9 "ro-ects using S/>) therefore listed fir9s will <e una<le to in2est
in "rofita<le long ter9 "ro-ects that would increase their net assets with the resultant 9ulti"lier effect on R&A)
hence listed fir9s which rel0 on S/> will alwa0s <e under in2esting. /his confir9s 40ers 1977# argu9ent.
/his o<ser2ed trend in ca"ital structure "resents so9e interesting results and will direct the e7tent at which listed
co9"anies can ta;e o""ortunities as the0 are "resented <0 the en2iron9ent) gi2en the fact that 9ost of the9 are
finance <0 short ter9 de<ts.

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.able /#": -escriptive Statistics Summar
S/> ?/> /, R&, R&A R&/3
4ean *.(2 *.*9 *.+9 *.1$ *.*6 *.*(
4a7 *.92 *.(7 *.9% 1.1% 1.2 *.+$
4in *.** *.** *.** -.9( -*.(% -*.%+
Source6 3onstructed fro9 .S, Fact <oo; 2**9

.able /#%: -escriptive Statistics for &odels "0 % 1 +
&odel 2ariable &ean Std# -ev#
1 R&, *.1776 *.+2$66
S/> *.(2*7 *.2626$
?/> *.*$91 *.12+($
/, *.+$71 *.2+$(%
2 R&A *.*(%7 *.1%2(7
S/> *.(2*7 *.2626$
?/> *.*$91 *.12+($
/, *.+$71 *.2+$(%
+ R&/3 *.*(1( *.1*(+$
S/> *.(2*7 *.2626$
?/> *.*$91 *.12+($
/, *.+$71 *.2+$(%

Source6 3onstructed fro9 .S, Fact <oo; 2**9

+.2 3orrelation Anal0sis
!earson correlation anal0sis showed the results as in /a<le %.+. 3orrelation is a single nu9<er that descri<ed the
degree of relationshi" <etween two 2aria<les. A !earson correlation indicates the direction) strength and
significance of the relationshi"s for all 2aria<les in the stud0) howe2er) it does not i9"l0 causalit0. /heoreticall0)
there could <e a "erfect "ositi2e correlation <etween two 2aria<les) which is re"resented <0 1.* or a "erfect
negati2e correlation) which is re"resented <0 -1.*. /he de"endent 2aria<les) R&,) R&A and R&/3 are
significant and "ositi2el0 correlated with each other) as highlighted in /a<le %.+ <elow.
/he correlation anal0sis "ro2ide earl0 sign that S/>) ?/> and /, are significantl0 related to R&,
corr. J *.+*7) "-2alue *.***) corr. J -*.2*7) "-2alueJ *.**+) corr.J -*.222) "-2alueJ *.**2#) and to R&A corr.J
-*.*2() "-2alueJ *.+7+) corr.-*.119) "-2alueJ *.*($) corr.J *.*9%) "-2alue J *.1*$# and to R&/3 corr.J -*.*9*)
"-2alueJ*.11$) corr.J -*.1+$ "-2alueJ*.*+() and corr. *.177) "-2alueJ *.**9#. As e2ident here) the de"endent
2aria<les e7hi<ited a wea; correlation with the e7"lanator0 2aria<les. Noticea<l0) low 2alues are re"orted in
co9"aring to O1 or -1. /hese therefore suggests the "ossi<ilit0 of finding close to @ero or a non-significant
relationshi"s in the ne7t ste" of the anal0sis de2oted to the esti9ation of the econo9etrics 9odels l to +
"resented in ta<le %.%.
.able /#+: Pearson Correlation &atrix
R&, R&A R&/3
S/> *.+*7
*.***#
-*.*2(
*.+7+#
-*.*9*
*.11$#
?/> -*.2*7
*.**+#
-*.119
*.*($#
-*.1+$
*.*+(#
/, -*.222
*.**2#
*.*9%
*.1*$#
*.177
*.**9#
Source6 3onstructed fro9 .S, Fact <oo; 2**9

+.+ Regression Results
A series of regression anal0ses were e7ecuted and the results and finding of which are su99ari@ed and "resented
in ta<le %.% <elow. 'ariance Inflation factor 'IF# of the 2aria<les in the regression 9odels were e7a9ined to
chec; for the "resence of 9ulti-co-linearit0 "ro<le9. /he >ur<in Hatson statistics that is shown in /a<le %.%
indicates that no serious serial correlation "ro<le9 e7ists.
F-test is used to test the h0"othesis that the 2ariation in the inde"endent 2aria<le e7"lained a
significant "ro"ortion of the 2ariation in the de"endent 2aria<le in the 9odel. /he F-test as shown in ta<le %.%
indicates that all the 9odels are significant in e7"laining the fir9sE "erfor9ance. Gowe2er) the e7"lanator0
"ower of the 9odels as shown <0 the ad-usted R
2
is 2er0 low co9"rising of $.6B) *.(B and +.2B. R-s=uare
Research Journal of Finance and Accounting www.iiste.org
ISSN 2222-1697 !a"er# ISSN 2222-2$%7 &nline#
'ol.() No.16) 2*1%

%2
9easures the "ro"ortion of the total 2ariation or dis"ersion in the de"endent 2aria<le that is e7"lained <0 the
2ariation of the inde"endent 2aria<le. /herefore R
2
infor9s us how good the line is <est fit and also 9easures the
"ercentage of change in the de"endent 2aria<le that is caused <0 the change in the inde"endent 2aria<le.
It follows therefore fro9 /a<le %.% thatA the results indicate that the e7"lanator0 2aria<les the ca"ital
structure ratios in this case# onl0 e7"lains $.6B of the 2ariations in R&, of listed co9"anies in .hana. /he
re"orted coefficient for S/> to R&, was *.++7 and not significant at "J*.2$Q(B) ?/> to R&, was -*.2(6 and
not significant at "J*.%69Q(B) and /, to R&, was *.**% and not significant at "J*.99*Q(B). /he sign agreed
with the direction h0"othesi@ed e7ce"t with ?/>. /he i9"lication to the ca"ital structure coefficient for e7a9"le)
that of S/> is that) the S/> is significant in 2ar0ing R&, <0 a change of *.++7 "er cedi of S/>) and ?/> -
*.2(6# and /, *.**%#.
&n the other hand *.(B of the 2ariations in R&A is e7"lained <0 the 2ariations in ca"ital structure.
/he re"orted coefficient for S/> to R&A was *.*2+ and not significant at "J*.$71Q(B) ?/> to R&A
was -*.112 and not significant at "J*.%$%Q(B) and /, to R&A was *.*7( and not significant at *.(96 i.e "Q(B#.
/he sign do agree with the direction h0"othesi@ed e7ce"t with ?/>. /he i9"lication to the ca"ital structure
coefficient for e7a9"le) that of ?/> is that) ?/> is significant in 2ar0ing R&A <0 a change of negati2e *.2(6
"er cedi of ?/>) and S/> *.*2+# and /, *.*7(#.
Si9ilarl0) +.2B of the 2ariations in R&/3 was accounted for <0 the 2ariations in ca"ital structure.
Further9ore) the re"orted coefficient for S/> to R&/3 was *.*11 and not significant at the
"J*.912Q(B) ?/> to R&/3 was -*.1*1 and not significant at "J*.+$7Q(B) and /, to R&A was *.*$7 and not
significant at "J*.%*+Q(B. /he sign do agree with the direction h0"othesi@ed e7ce"t with ?/>. /he i9"lication
of the ca"ital structure coefficient for e7a9"le) that of ?/> is that) a unit change in ?/> will reduce R&/3 <0
*.1*1 "er cedi) controlling for other factors and that a unit change in S/> will increase R&/3 <0 *.*11 "er cedi
and finall0 a unit change in /, will also increase R&/3 <0 *.*$7 "er cedi.
Fro9 /a<le %.% <elow) it can <e concluded that S/> and /, ha2e a significant "ositi2e relationshi"
with R&,) R&A and R&/3 <ut ?/> has a significant negati2e relationshi" with R&,) R&A and /,. In the case
of S/> the result is consistent with the findings of A<or) 2**7# which concluded in the case of South AfricaA
Lthe result e7hi<ited a statisticall0 significant "ositi2e relationshi" <etween S/> and R&AM 5ased on the a<o2e
findings) I do not re-ect the null h0"othesis. /his finding is also su""orted <0 .ross9an and Gart 19$2# who
argued that higher le2els of de<t in the fir9Es ca"ital structure will <e directl0 associated with higher
"erfor9ance. In the case of ?/>) it is consistent with 4es=uita and ?ara 2**+# who found that ?/> is not
significant with R&,) which agrees with Fa9a and French 199$# and 4iller 1997# <ut this has further <een
e7tended <0 this stud0 to R&A and R&/3.
/he a<o2e results 9eans that returns to a co9"an0 9ust <e well "lanned in line with ca"ital structure.
.able /#/ ,egression results
>e"endent 'ar. R&, R&A R&/3
Inde"endent 'ar. 4odel 1
3oefficient
!-'alue#
4odel 2
3oefficient
!-'alue#
4odel +
3oefficient
!-'alue#
3onstant *.*2+ *.*2+ *.21
S/> *.++7
*.2$1#
*.*2+
*.$71#
*.*11
*.912#
?/> -*.2(6
*.%69#
-*.112
*.%$%#
-*.1*1
*.+$7#
/, *.**%
*.99*#
*.*7(
*.(96#
*.*$7
*.%*+#
R
2
*.*$6 *.**( *.*+2
>H S/A/S 1.$+$ 1.9%* 1.$((
F-S/A/S 6.%72
*.*1#
1.+*6
*.27%#
2.91+
*.*+6#
N 17( 17( 17(
Significant at *.*( le2el. Source6 3onstructed fro9 .S, Fact <oo; 2**9

/# Conclusion
An i9"ortant o<ser2ation fro9 the stud0 was that 61B of the total ca"ital of listed co9"anies is 9ade u" of de<t.
&f this) (2B constitute short-ter9 de<ts while 9B is 9ade u" of long-ter9 de<ts with e=uit0 accounting for +9B.
/his 9eans that listed co9"anies are highl0 le2ered and showed o2er reliance on short ter9 de<ts.
/he ne7t o<ser2ation was that S/> and /, ha2e a significant "ositi2e relationshi" with R&,) R&A and R&/3
<ut ?/> has a significant negati2e relationshi" with R&,) R&A and /,. It follows therefore that) the
Research Journal of Finance and Accounting www.iiste.org
ISSN 2222-1697 !a"er# ISSN 2222-2$%7 &nline#
'ol.() No.16) 2*1%

%+
e7"lanator0 2aria<les the ca"ital structure ratios in this case# "artiall0 e7"lain $.6B of the 2ariations in R&, of
listed co9"anies in .hana. &n the other hand *.(B of the 2ariations in ca"ital structure) e7"lains the 2ariations
in R&A. Si9ilarl0) +.2B of the 2ariations in ca"ital structure accounted for the 2ariations in R&/3.
/he result fro9 the descri"ti2e statistics also showed that o2er the "eriod under stud0) the "erfor9ance
of listed co9"anies 9easured <0 R&,) R&A and R&/3 were 1$B) 6B and (B res"ecti2el0. /he higher
"erfor9ance le2els of R&, 9ight ha2e <een contri<uted <0 ta7 shield of interest and disci"linar0 role i9"osed
<0 high short ter9 de<ts. /his i9"lies that 9anage9ent of fir9s can use short ter9 de<t decisions to increase the
return on the fir9. /he stud0 therefore shows that all the 9odels tested ha2e a 2er0 low e7"lanator0 "ower on
fir9 "erfor9ance. /he 9odels were all free of 9ulti-co-linearit0 "ro<le9 <ased on 'ariance Inflation Factor)
and serial correlation <ased on >ur<in-Hatson statistics.
It should therefore <e the <urning desire of to" 9anage9ent of e2er0 fir9 to 9a;e "rudent financing
decision in order to re9ain "rofita<le and co9"etiti2e in sustaining de2elo"9ent) in this new econo9ic
"aradig9. /he go2ern9ent of .hana 9ust assist to de2elo" the de<t 9ar;et so that co9"anies can raise a lot of
de<t which the0 need to 9eet their short to 9ediu9 ter9 loan o<ligations as a <edroc; for sustaina<le
de2elo"9ent in .hana.

,EFE,E3CES
A<or) J. 2**7#) >e<t "olic0 and "erfor9ance of S4,s6 e2idence fro9 .hanaian and South
African fir9s. ,he -oural of .i#/ 0ia*e1 2(&). 33. $+&-$45
A<or) J. 2**$#. >eter9inants of the 3a"ital Structure of .hanaian Fir9s. Research !a"er No.176. 6fri*a
E*oo7i* .e#ear*h 8o#ortiu71 9airobi.
A9idu) 4. 2**7#) >eter9inants of 3a"ital Structure of 5an;s in .hana6 An ,9"irical A""roach. :alti*
-oural of ;aa!e7et 2(1). 33. +4-45
>adson A.'. F 5adu J. 2*12# 3a"ital Structure and !erfor9ance of ?isted 5an;s in .hana) <lobal -oural of
=u7a >o*ial >*ie*e1 Vol 12 ?##ue ' ( 3 '4-+1).
Fa9a) ,.F. and French) 8.R. 199$#) Financing >ecisions) and Fir9 'alue) -oural of 0ia*e) (+) $19-%+#.
.hana Stoc; ,7change Fact <oo; 2**9
.reen) 3.J.) 4urinde) ' and Su""a;it-ara;) J. 2**2#. 3or"orate Financial Structure in India. E*oo7i*
.e#ear*h @a3er 9o. A2/&. 8etre for ?teratioal1 0ia*ial ad E*oo7i*# .e#ear*h1 De3art7et of
E*oo7i*#1 Bou!hborou!h CiDer#ity1 Bou!hborou!h.
.ross9an) S. J. and Gart) &. 19$2#) 3or"orate Financial Structure and 4anage9ent Incenti2es) ,he E*oo7i*#
of ?for7atio ad C*ertaity (ed. ;*8all1 -. -.)1 CiDer#ity of 8hi*a!o @re##1 8hi*a!o. 33.1A4-1&A
.u-arati >.N. 2**%#) 5asic ,cono9ics %
th
,dition 4c.raw Gill) ""2( F 2*%
4es=uita and ?ara 2**+# 3a"ital structure and "rofita<ilit0) the 5ra@ilian case. Eor/i! 3a3er1 6*ade7y of
:u#ie## 6d7ii#tratio >*ie*e 8ofere*e1 Va*ouDer1 -uly 11-1$
4iller) 4.G. 1977#) >e<t and /a7esM) -oural of 0ia*e1 $2(2+1%4+).
4odigliani) F. and 4. 4iller. 196+#) 3or"orate inco9e ta7es and the cost of ca"ital6 A correction. 67eri*a
E*oo7i* .eDie"1 '$(&&$%'$).
4odigliani) F.A 4iller) 4.G. Jun.) 19($#/he 3ost of 3a"ital) 3or"oration Finance and the /heor0 of In2est9ent.
,he 67eri*a E*oo7i* .eDie"1 &2($)2+1-254.
40ers) S.3. 2**1#) 8a3ital >tru*ture)) -oural of E*oo7i* @er#3e*tiDe#1 1(2# $1K1*2.
40ers S.3.and 4a-luf N.S. 19$%# 8or3orate fia*i! ad iDe#t7et de*i#io# "he fir7# haDe ifor7atio
that1 iDe#tor# do ot haDe)
40ers S.3. 19$%# /he 3a"ital Structure !u@@leM,he -oural of 0ia*e1 Vol. $51 9o. $133. '4'-'52.
/it9an) S. 19$%#) /he ,ffect of 3a"ital Structure on a Fir9Es ?i=uidation >ecisions1 -oural of 0ia*ial
E*oo7i*#) 1+1+7K(1#.
/it9an S.A Hessel R. 4ar. 19$$# /he >eter9inants of 3a"ital Structure 3hoiceM ,he -oural of 0ia*e1
&$(1)215 % 22+

ACK3456E-GE&E3.S
I a9 than;ful to the .hana stoc; e7change and all the +( listed co9"anies that 9ade their data accessi<le to
0oung researchers. Ne7t is 90 gratitude to the organi@ers of the 7
th
annual A""lied Research 3onference
8oforidua) .hana for "ro2iding the "latfor9 for 0oung researchers to showcase and "resent their stud0 to glo<al
e7"erts and audience. I a9 than;ful to the resource "ersons and 9e9<ers of the re2iew tea9 for their insightful
co99ents and suggestions fro9 the <eginning of the stud0 to its co9"letion. I also a""reciate the useful
co99ents <0 >r .eorge &wusu Antwi for hel"ing i9"ro2e the =ualit0 of the "a"er and >r. Ro<ert Awuah
5affour for his ad2ice which has <rought 9e this far. I a9) howe2er) res"onsi<le for errors and o9issions in the
stud0
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