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

Joshua Abor (University of Ghana Business School, Legon, Ghana)

Journal of Risk Finance

ISSN: 1526-5943

Publication date: 1 December 2005

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.

Keywords

Citation

Abor, J. (2005), "The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana", Journal of Risk Finance, Vol. 6 No. 5, pp. 438-445. https://doi.org/10.1108/15265940510633505

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2005, Emerald Group Publishing Limited

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