Capital Structure Decisions Nexus on Listed Non-Financial Institutions’ Performance in Ghana.

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue II, February 2022 | ISSN 2454–6186

Capital Structure Decisions Nexus on Listed Non-Financial Institutions’ Performance in Ghana.

Job Boahen (Ph.Dc, Valley View University,Accra-Ghana)

Abstract
The study examined capital structure decisions nexus on listed non-financial institutions in Ghana using quantitative research approach and secondary data in the form of financial statements obtained from the Ghana Stock Exchange for the period 2014 to 2020.
The study used a sample size of 22 from a population of 33 comprising total non-financial listed institutions on the Ghana Stock Exchange. Financial and insurance institutions totalling 9, were excluded to mitigate any impact of outliers since the financial market is highly regulated with varied set of rules and regulations.
Capital structure was determined using return on capital employed computed from the financial statements of the sampled firms. The findings showed an indirect negative association with debt finance and significant direct association with equity finance with respect to return on capital employed.
The study concluded that capital structure decisions positively affect equity source of finance and thus recommends that listed firms in Ghana should maximize equity funding due to the expensive nature of debt finance in developing countries. Equity finance also improves management by bringing in experts and experienced shareholders to facilitate the routine operations of the firms.

Basic words: Capital structure, performance, listed firms and Ghana.

1.0 INTRODUCTION

Finance remains the wheels that engineer firm profitability and growth. A firm financial structure could foster its long term survival or distress. The financial structure of a firm could be in the form finance requires that a decision on capital structure should be one that maximizes shareholders wealth (Akomeah, Bentil & Musah, 2018).
Debt financing has grown in favour in the finance literature as a result of the tax deductibility of interest payments, which makes it less expensive than stock (Akomeah et al.,2018). This increases profitability and, as a result, meets the goal of maximizing shareholder value. Debt financing also ensures that the current control of equity stockholders is not diluted (Musah,2017). Overdependence on debt, on the other hand, leads to bankruptcy costs and financial trouble. Even if a company is not profitable, debt providers would demand on interest and principal payments.
There is a school of thought that believes that debt financing is preferable to equity financing. Firm owners have residual claims, therefore dividend payments would generally be withheld if the company is not profitable, giving the company some breathing room in difficult times. Dividends, on the other hand, are not tax deductible. Due to the lack of an optimal capital structure guideline and the fact that each source of finance has its own set of advantages and disadvantages, the golden rule for businesses is to maintain a capital structure that minimizes cost of capital and maximizes shareholder wealth.

Experts in corporate finance and academics disagree on whether capital structure is a significant element in determining a company’s performance. Modigliani and Miller (MM), (1958), produced an initial capital structure theorem: the theorem of capital structure irrelevance, in the absence of any previously accepted capital structure theory (Ahmeti & Prenaj, 2015). The cornerstone of corporate finance theory is this theorem, which is well-known. Their theorem proposed that capital structure has no bearing on maximizing a firm’s worth. The theorem considers capital structure in the absence of taxes, transaction costs, and other frictions in a perfect market economy (Modugu, 2013). Firms must be agnostic about the mix of their capital structure in such an economic climate. They came to the conclusion that debt, equity, or a combination of the two did not increase shareholder wealth or value, and hence leveraged firms’ worth is comparable to that of unleveraged entities.
Other theories challenge the MM theorem’s assumptions, arguing that capital structure matters in determining a firm’s worth. The Trade-off Theory (TOT), Pecking Order Theory (POT), Bankruptcy Cost Theory, Signaling Theory, Agency Cost Theory (ACT), and Market Timing Theory are examples of such ideas (MTT). Several empirical study findings continue to refute the MM theorem, while others have backed up the MM’s findings.

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