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The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana

Author

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  • Joshua Abor

Abstract

Purpose - This paper seeks to investigate the relationship between capital structure and profitability of listed firms on the Ghana Stock Exchange (GSE) during a five‐year period. Design/methodology/approach - Regression analysis is used in the estimation of functions relating the return on equity (ROE) with measures of capital structure. Findings - The results reveal a significantly positive relation between the ratio of short‐term debt to total assets and ROE. However, a negative relationship between the ratio of long‐term debt to total assets and ROE was found. With regard to the relationship between total debt and return rates, the results show a significantly positive association between the ratio of total debt to total assets and return on equity. Originality/value - The research suggests that profitable firms depend more on debt as their main financing option. In the Ghanaian case, a high proportion (85 percent) of the debt is represented in short‐term debt.

Suggested Citation

  • Joshua Abor, 2005. "The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 6(5), pages 438-445, December.
    • Handle: RePEc:eme:jrfpps:15265940510633505
    DOI: 10.1108/15265940510633505
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    Citations

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    Cited by:

    1. Massimiliano Cerciello & Francesco Busato & Simone Taddeo, 2023. "The effect of sustainable business practices on profitability. Accounting for strategic disclosure," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(2), pages 802-819, March.
    2. Ekote Nelson Nnoko & Yuji Maeda, 2023. "Impacts and risks of borrowing on corporate performance: evidence from Japan and Sub-Saharan Africa," Asia-Pacific Journal of Regional Science, Springer, vol. 7(1), pages 119-133, March.
    3. Rashid, Mamunur & Nur Khoirunnisaa Pg Hj Johari, Dk Siti & Izadi, Selma, 2023. "National culture and capital structure of the Shariah compliant firms: Evidence from Malaysia, Saudi Arabia and Pakistan," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 949-964.
    4. Hung, Dang Ngoc, 2022. "The Impact Of Capital Structure On The Enterprise Value: Approaching By Threshold Regression," OSF Preprints rf2mc, Center for Open Science.
    5. Jana STEKLA & Marta GRYCOVA, 2016. "The relationship between profitability and capital structure of the agricultural holdings in the Czech Republic," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 62(9), pages 421-428.
    6. Zaheda Daruwala, 2023. "Influence of Financial Leverage on Corporate Profitability: Does it Really Matter?," International Journal of Economics and Financial Issues, Econjournals, vol. 13(4), pages 37-46, July.
    7. Allan Okwenda Asola, 2024. "Capital Structure and Financial Performance of Insurance companies listed at Nairobi Securities Exchange," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(1), pages 760-778, January.
    8. Leo Vashkor Dewri, 2022. "A Critical Assessment of Interrelationship Among Corporate Governance, Financial Performance, Refined Economic Value Added to Measure Firm Value and Return on Stock," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(4), pages 2718-2759, December.
    9. Tung Duy Bui & Huan Huu Nguyen & Vu Minh Ngo, 2021. "Financial leverage and performance of SMEs in Vietnam: Evidence from the post-crisis period," Economics and Business Letters, Oviedo University Press, vol. 10(3), pages 229-239.
    10. M N, Nikhil & S Shenoy, Sandeep & Chakraborty, Suman & B M, Lithin, 2023. "Does the Ind AS moderate the relationship between capital structure and firm performance?," MPRA Paper 119541, University Library of Munich, Germany, revised 15 Oct 2023.
    11. Obi Berko Obeng Damoah & Augustine Awuah Peprah, 2021. "Synthesis of small and medium enterprise research in Ghana," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 11(1), pages 451-468, December.
    12. M N, Nikhil & S Shenoy, Sandeep & Chakraborty, Suman & B M, Lithin, 2023. "Is the Nexus Between Capital Structure and Firm Performance Asymmetric? An Emerging Market Perspective," MPRA Paper 119669, University Library of Munich, Germany, revised 17 Nov 2023.
    13. Anokye M. ADAM & Edward QUANSAH & Seyram KAWOR, 2017. "Working Capital Management Policies And Returns Of Listed Manufacturing Firms In Ghana," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 64(2), pages 255-269, June.
    14. Vlora Prenaj & Iliriana Miftari & Besnik Krasniqi, 2023. "Determinants of the Capital Structure of Non-Listed Companies in Kosovo," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 36-50.

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