The Impact of Capital Structure and Profitability of Listed Banks on the Ghana Stock Exchange

We studied the impact of capital structure and profitability of listed banks on the Ghana Stock Exchange using a panel data methodology. Capital structure theories have been utilized to provide the theoretical basis for the work. The study considered all the 9 banks listed on the Ghana Stock Exchange over the period 2005-2012. The distribution patterns of data and applied statistical techniques used in the study include descriptive statistics, correlation analysis and regression analysis. The study variables also include Return on Asset, Return on Equity, Tobin’s q ratio, Economic Value Added (EVA) being the dependent variables and independent variables are: Total Leverage, Debt to Equity ratio, Total Liability of the banks, Size and the Age of the banks. It was observed that 76% of the total capital of banks in Ghana is made up of debt. Of this, 75% constitute both short-term debts and long-term debts. This has reaffirmed the fact that banks are highly levered institutions and also highlights the negative relation between leverage and profitability amongst the listed banks on the Ghana Stock Exchange. These findings agree with Abor (2005) and Amidu (2007) who stressed on the importance of short term debt in firm financing in Ghana. A negative relationship between bank size and profitability suggests that larger banks tend to exhibit lower profits and is consistent with models that emphasize the negative role of size from scale inefficiencies.