Examining The Impact Of Capital Structure On Profitability Of Manufacturing Industry In Ghana: A Study Of Selected Firms.

Abstract

The overarching purpose of the research was to assess the impact of capital structure on profitability of manufacturing industry in Ghana using some selected firms as the case study for a period of eight (8) years: 2005-2012. Fifteen (15) firms were selected from different sub sectors of the manufacturing industry. Thirteen (13) of them were firms listed on the Ghana Stock Exchange (GSE) whilst the other two were from the private sector. Data for the study were obtained from the audited financial statements of the selected firms from the GSE and the individual firms website or obtained with permission. Return on equity (ROE) or profit after interest and tax was used to representing profitability, whilst capital structure was represented by the natural logarithms of short term debt (STD), long term debt (LTD) and equity (EQ). Panel data regression method, using both the fixed-effects and the random- effects, was used for the data analysis. Descriptive statistics and correlation analysis were also employed in the study. The result shows that STD and LTD were negatively related to profitability but the effect of the LTD was insignificant. Whilst EQ was positively related to profitability. This was consistent with previous empirical studies and also with literature. The study recommends that manufacturing firms in Ghana should use equity such as retained earnings to expand their business instead of debt. For future research it is recommended that a study should be done by considering increasing the sampled firms to cover other manufacturing sectors; by considering more firms in the private sector and also looking at the effect of total debt on profitability in the industries.