Effects of capital structure on the financial performance of listed banks in Ghana

Abstract

This study examines the effect of capital structure (measures as short-term debt ratio, long term debt ratio, and total debt ratio) on financial performance (measured by Return on Assets and Return on equity) of listed banks in Ghana. The study considered all the nine (9) listed banks in Ghana over a 11-year period (2010-2020) while secondary data was extracted from the annual report of the banks A dynamic panel approach of difference Generalized Method of Moments was used to analyze the data of the study. The regression analysis revealed short term debt ratio, long-term debt ratio and total debt ratio all have statistically negatively relationship with Return of Equity (profitability) of banks in Ghana. The result suggests that an increase in any of short term debt, long-term debt or total debt of their capital structure would lead to a reduction of the profitability of banks in Ghana. On the macroeconomic variables the study found inflation and exchange rate to have statistically positive and negative relationship respectively; with financial performance of listed banks in Ghana. The results call for management of banks to have an efficient and effective credit policy that improves the performance level and credit policy should contain upper and lower limits of taking credit or debt to reduce finance cost. As high finance cost would adversely affect their financial performance, managers must always be alert on the level of debt to equity so as not to affect profitability negatively.