Abstract:
The study investigated the relationship between leverage and firm performance in Ghana over the period 2004 to 2008. Using time series data, the study covered the 8 listed banks over the period 2004-2008.
The study observed that short term debt (STD), long term debt (LTD), and Equity respectively accounted for 31% of the variations of return on equity, 22% of the variations of return on assets and 22% of the variation of operating profit during the study period.
Leverage was found to be significant (at 0.05) in influencing or determining the operating profit, returns on equity and return on assets of listed banks in Ghana.
Description:
Capital structure decision is fundamental for any business organization because of the need to maximize return to the various stake holders and also because of the fact that such decision has great impact on the firms’ ability to deal with competitive environment. One crucial issue confronting managers today is how to choose the combination of debt and equity to achieve optimum capital structure that would minimize the firm’s cost of capital and improves return to owners of the business. Even though generally firms have a choice as to how to combine debt and equity, managers attempt to ascertain a particular combination that will maximize profitability and the firm’s market value.
