The Relationship between capital structure measures and financial performance: evidence from Ghana

Abstract

One of the areas that has been a focus of intense debate when it comes to capital structure research is whether to use the book value or market value of capital structure as the accurate measure of financial leverage (Salehi & Biglar, 2009). Various arguments have been raised in favour of which of the measures researcher should use in capital structure studies. However, much has not been done to determine which of the measures has a more significant relationship with financial performance. Therefore the thrust of this paper was to establish the relationship between capital structure measures and financial performance so to determine which of the capital structure measures has a stronger association with financial performance. Two definitions of capital structure measures (book value & market value) and six financial performance measures were used. For this study, fifteen companies on the Ghana Stock Exchange (GSE) were selected over a 6-year time period (2002–2007). The outcome of the study established that the capital structure of firms influences their performance. Many measures of firm performance were negatively correlated with financial leverage. Meaning, companies with less debt in Ghana have high profit margins and good financial performance. The study established that the market value of capital structure has a stronger relation with financial performance as compared to the book value. Researchers should therefore consider first, the use of market value in any studies on capital structure