Effect of capital structure on firm value: a case study of listed manufacturing firms in Ghana

Abstract

Previous empirical literature demonstrates conflicting results on the effect of capital structure on firm value. Building on extant literature on the effect of capital structure on firm value, this study was undertaken to examine the effect of capital structure on the firm value of manufacturing companies listed on the Ghana Stock Exchange (GSE). In particular, the study analyzed the effect of Equity and Long Term Debt as components of capital structure on the firm value of listed manufacturing companies in Ghana. To achieve the research objectives, a panel data of firms spanning the period 2008 to 2012 were collected from the annual published financial statements of 8 sampled firms. The study employed a multiple regression technique to estimate the impact of capital structure on firm value. The outcome of the study shows that both Equity and Long Term Debt have positive impact on the value of listed manufacturing firms. However, the study found that the effect of debt capital on firm value is pronounced relative to equity. From the financial management perspective, the findings of the study provide enough grounds for the utilization of both equity and debt capital in the financing activities of listed manufacturing firms. But it is recommended from the findings of the study that firms employ more debt capital than equity capital to finance business activities because of its greater impact on firm value vis-a –vis equity. The study culminates by outlining suggestions for further research. It is suggested that future research studies conduct longitudinal studies to measure the stability or otherwise in research findings.