The IUP Journal of Accounting Research and Audit Practices:
The Effect of Capital Structure on Organizational Performance of Listed Ghana Club 100 Companies

Article Details
Pub. Date : Jul, 2020
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP10720
Author Name : Eric Boachie Yiadom, John Kweku Mensah Mawutor, Richard Fosu Amankwa,Stephen Yalley
Availability : YES
Subject/Domain : Finance
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No. of Pages : 15

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Abstract

The paper examines the effect of capital structure on the organizational performance of listed Ghana Club 100 companies on the Ghana Stock Exchange during a 10-year period from 2007 to 2016. The study focuses on Ghana Club 100 companies because these companies are touted as the role model for their peers. The Ghana Club 100 companies are the top 100 companies in Ghana that are ranked annually in order of excellent performance by the Ghana Investment Promotion Center. The three key ranking criteria used by the GIPC are size, profitability and growth. The study employs a Fixed Effect Panel Regression Model to test these variables in the light of capital structure adequacy and performance. The results showed a negative relationship between capital structure and organizational performance. Specifically, the different measures of debt to total capital reduce firms' performance. The study is robust to the use of different measures of capital structure. The study proposes that the high gearing levels among GC 100 firms are not profit enhancing.


Description

The concept of good financial management decisions has been an issue of concern to various firms across the globe. At the heart of this financial management pandemonium is capital structure choice that would be profit enhancing. Specifically, studies have attempted to find an optimal capital structure that could improve profit of firms (Addae et al., 2013; Saeed et al., 2013; Akeem et al., 2014; and Abor, 2005 ). The importance of an optimum capital structure is that it maximizes the value of the firm (Addae et al., 2013). This is possible because an optimal capital structure leads to minimum weighted average cost of capital which denotes lower cost of doing business. Although an earlier study by Modigliani and Miller (1958) posited that capital structure does not have any connection with the value of a firm, recent empirics revealed that the mix of debt and equity financing tend to affect the value of a firm (Abor, 2005; and Saeed et al., 2013). Abor (2005) discovered a positive correlation between profitability and gearing level of firms. The effect of appropriate capital structure cannot be marginalized. In Ghana, best performing firms are ranked and drafted into the Ghana Club 100 (GC 100) annually by the government through the Ghana Investment Promotion Center (GIPC). Largely, firms that are drafted into the coveted GC 100 are top performers in their industries and serve as role model to other firms. The ranking is purely based on three indicators: size, profitability and growth (GIPC, 2018). Recently, some firms among the GC 100 have come under intense scrutiny to be a source of concern. For instance, in the wake of Ghana's banking sector cleanup; five banks among the GC 100 were taken over by the Bank of Ghana mainly due to liquidity challenges (Bank of Ghana, 2019). In this study, we test the three indicators in the light of capital structure adequacy and performance.


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