The Relationship between Capital Structure Measures and Financial Performance: Evidence from Ghana

Kwame Mireku, Samuel Mensah, Emmanuel Ogoe

Abstract


One of the areas that has been a focus of intense debate when it comes to capital structure research is whether touse 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 incapital structure studies. However, much has not been done to determine which of the measures has a moresignificant relationship with financial performance. Therefore the thrust of this paper was to establish therelationship between capital structure measures and financial performance so to determine which of the capitalstructure measures has a stronger association with financial performance. Two definitions of capital structuremeasures (book value & market value) and six financial performance measures were used. For this study, fifteencompanies on the Ghana Stock Exchange (GSE) were selected over a 6-year time period (2002–2007). Theoutcome of the study established that the capital structure of firms influences their performance. Many measuresof firm performance were negatively correlated with financial leverage. Meaning, companies with less debt inGhana have high profit margins and good financial performance. The study established that the market value ofcapital structure has a stronger relation with financial performance as compared to the book value. Researchersshould therefore consider first, the use of market value in any studies on capital structure.

Full Text: PDF DOI: 10.5539/ijbm.v9n6p151

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International Journal of Business and Management   ISSN 1833-3850 (Print)   ISSN 1833-8119 (Online)

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