Munich Personal RePEc Archive

The Effect of Debt Policy on Firms Performance: Empirical Evidence from Listed Manufacturing Companies on The Ghana Stock Exchange

Prempeh, Kwadwo Boateng and Nsiah Asare, Evelyn and sekyere, Allan McBright (2016): The Effect of Debt Policy on Firms Performance: Empirical Evidence from Listed Manufacturing Companies on The Ghana Stock Exchange.

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Abstract

Adopting a Debt Policy is considered as a momentous decision that influences the firm's value. The purpose of this Study is to empirically investigate the effect of Debt Policy (Short-Term Debt, Long-Term Debt, and Total Debt) on firms’ performance. Annual data was collected from five (5) manufacturing companies listed on the Ghana Stock Exchange (GSE) between 2005 to 2015. The panel data regression model was used to test if there was a significant relationship between the debt ratios and the performance indicators. The financial performance indicators employed in this Study are Gross Margin Profit, Return on Assets (ROA), Tobin's Q Ratio, and Debt Ratios employed are (Short-Term Debt, Long- Term Debt and Total Debt). Firm size and growth opportunity are considered as control variables. The results revealed that listed manufacturing firms in Ghana use 14% equity capital and 86% debt capital to finance their operations. The debt structure is made up of 49% long-term debt and 37% short-term debt. It was also found that debt (Short- Term Debt, Long Term Debt and Total Debt) has a negative effect on firms’ performance. It is, therefore, recommended that listed manufacturing firms should increase the level of equity finance and exploit the advantages of leverage. The Ghanaian government should take concrete steps to develop the country's capital market to enable businesses access long-term capital necessary for the financial performance of the firm in the long run.

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