Assessing the Effect of Leverage on the Performance of Firms in an Emerging Economy

Leverage has been argued to be a crucial factor in determining profitability, and a number of studies have looked at its direct impact on firm performance, but the conclusions have been equivocal and contested. Using a dynamic panel model, the study attempted to contribute to the growing literature by first examining the impact of leverage on firm performance in Ghana, as well as the moderating function of firm size. The study’s data came from listed companies. The study’s sample consisted of all the companies listed on the Ghana stock exchange with particular focus on the financial firms. Dynamic panel estimation approach, specifically Arello and Bond GMM estimation technique was used for the analyses. The results show that the effect of leverage on firm performance depends on the size of the firm. For small firms, leverage has negative effect on performance. But as firms increase in size, the negative effect of increasing leverage reduces and turns positive for very large firms. The study recommended that leaders at the firm’s helms of affairs can consider diversifying their products and service in order to expand their reach and increase their size which can positively affect performance. The study finally recommends that further studies should be conducted on all firms and on all financial firms listed on the Ghana stock exchange.