Effects of macroeconomic uncertainty on capital structure choices for non-financial firms on the Ghana Stock Exchange

Abstract

The study examined the effects of macroeconomic variables on capital structure choice of non-financial listed firms in Ghana. The capital structure variables used were short term debt, long term debt and total debt. Macroeconomic variables were measured using inflation rate, interest rate and GDP growth rate. The study employed pure quantitative method and panel data covering the period from 2004 to 2014. Annual data for capital structure and macroeconomic variables were collected from 2004 to 2014 and the panel ordinary least square estimator was used to establish the relationships between capital structure and macroeconomic variables. The result revealed that 59.40% of the total capital of the non-financial firms in Ghana is made up of debts. Of this 48.46% constitute short-term debt while 12.40% is long-term debt. It is therefore concluded that non-financial firms listed on the GSE rely heavily on debt to finance their operations. The regression results for inflation rate, interest rate and GDP growth rate had negative relationships with short term debt and total debt. Interest rate had a positive relationship and inflation and GDP growth rates had negative relationships with long term debt. The overall results show that macroeconomic variables had no significant effect on capital structure of nonfinancial firms listed in Ghana. While by entering control variables such as return on asset, return on equity, asset structure and firm size, the effects become significant in relation to short term debt. It is therefore recommended that management should focus on internal factors and closely observe the economic fundamentals so as to respond to movements in macroeconomic variables.