International Journal of Finance and Banking Research
2016; 2(5): 167-177
http://www.sciencepublishinggroup.com/j/ijfbr
doi: 10.11648/j.ijfbr.20160205.12
ISSN: 2472-226X (Print); ISSN: 2472-2278 (Online)
Capital Structure Dynamics of Listed Banks in Ghana
Anthony Kusi1, *, Joseph Yensu1, Kobina Eduful Aggrey2
1
Institute of Entrepreneurship and Enterprise Development, Kumasi Polytechnic, Kumasi, Ghana
2
Bank of Africa Ghana Limited, Kumasi, Ghana
Email address:
anthonykusi61@gmail.com (A. Kusi), joseph.yensu123@gmail.com (J. Yensu), kobgrey@yahoo.com (K. E. Aggrey)
*
Corresponding author
To cite this article:
Anthony Kusi, Joseph Yensu, Kobina Eduful Aggrey. Capital Structure Dynamics of Listed Banks in Ghana. International Journal of
Finance and Banking Research. Vol. 2, No. 5, 2016, pp. 167-177. doi: 10.11648/j.ijfbr.20160205.12
Received: June 20, 2016; Accepted: July 12, 2016; Published: August 22, 2016
Abstract: The aim of this paper is to provide a comprehensive review on Capital Structure Dynamics of Listed Banks in
Ghana. The study examines the determinants of capital structure, the significance of performance on equity and leverage.
Seven (7) Banks on the Ghana Stock Exchange were used for the periods 2005 to 2012 The fixed and random effect regression
technique was used. The study found Asset Tangibility and Non-debt tax shield to have a positive relationship with equity. The
study also discovered that, the size of a bank was a significant determinant of equity and also has a positive association with
equity. There was a positive relationship between performance and equity. There was also a negative relation with Growth
opportunity of a bank, Dividend policy and equity. Performance and size of a bank are the determinants of leverage. There was
a statistically significant positive relation with leverage and a negative statistically significant relation with the size of a bank.
The study found Leverage to have positive relationships with Asset Tangibility, Non-debt tax shield and Dividend ratio. The
study also discovered a negative association between Growth Opportunity of a bank and Leverage.
Keywords: Capital Structure, Equity, Performance, Panel Data, Listed Banks, Ghana
1. Introduction
Capital Structure can be defined as the technique a Bank
funds its assets by a mixture of equity , debt, or hybrid
securities (Abor, 2008). In reality, there is financial risks in
taking on too much debt, so each bank must find a balanced
structure. Corporate segment progress is essential to
economic expansion. The concern of money has been surely
understood as a sudden motivation behind why commercial
enterprises in developing nations are unsuccessful to begin or
to progress. It is intended for Banks in creating nations to be
fit for financing their activities and create over a time frame
on the off chance that they are to have amassed a driving
influence in giving employments and also salary as benefits,
dividends and wages to family units (Abor, 2008). Capital
Structure choices spotlights on the blend of long haul
financing sources utilized by the firm. Accordingly, Capital
Structure choices must consider the general financing
arrangement of the organization including the utilization of
exchange credit.
Interestingly, budgetary structure is a term used to portray
the general liabilities and total assets of the firm. That is to
say, the monetary structure choice is a financing blend choice
and the Capital Structure choice is a piece of it (Myers,
2001). That is the long haul financing part of the general
financing choice.
The few studies on developing nations have not set up
themselves on the fundamental actualities. Singh and Hamid
(1992) used measurements on the biggest firms in assigned
creating nations. It was finished up that firms in rising
nations made the utilization of outer money to subsidize their
improvement than is as a rule in effectively created nations.
They further closed by expressing that firms in developing
nations will tend to lay on additional equity fund rather than
debt finance. These disclosures seem unanticipated given that
the advancement of stock markets in such nations is neverendingly less created contrasted with created nations,
especially for values. Regardless, a study by Indian scientists,
Cobham and Subramaniam (1998) utilized a specimen of
bigger firms and subsequently inferred that Indian firms
utilize strikingly bring down external and equity financing. In
an investigation of expansive organizations in ten creating
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Anthony Kusi et al.: Capital Structure Dynamics of Listed Banks in Ghana
nations, Corner et al. (2001) likewise finished up that debt
ratios contrasted significantly with developing nations,
however in general, were not out of track with comparative
information.
Information of late hypothesis of Capital Structure is the
noteworthy commitment of Modigliani and Miller (1958)
under the ideal capital business sector supposition.
Modigliani and Miller (1958) expected that under state of no
bankrupt cost and frictionless capital markets without taxes, a
firm’s worth is self-governing of its Capital Structure.
A different school of an idea clenches the opinion that
funding decision mirrors an effort by business directors to
adjust duty protection of more prominent obligation beside
potential vast cost of budgetary trouble emerging from less
speculation. Yet if much equity debt equity can hammer
company's value by bringing on money related trouble and
under speculation then too little obligations can additionally
prompt excessive investment and undesirably influence
earnings especially in extensive and experienced Bank
(Barclays and Smith, 2005).
The decision of Capital Structure and its consequent
optimal danger presentation is exceptionally overwhelming
in financial execution of each bank. This is on account of the
decision of capital structure ought to in the long run lead to a
result in the improvement in the value of investment made
the different gatherings of agents generally equity speculators
(Watson and Head, 2007). This is noteworthy in view of the
way that equity lenders have prevalent anticipation of
incomes on their investment as higher dividends and capital
increase (Sulaiman, 2001).
As a developing country, Ghana still has vast untapped
human and natural resources. The principle issue however is
that capital for investment is inadequate. There has been
dependence on outside sources of capital for investment. It
has however been observed that if Ghana is to gain any
significant ground in financial development, she will have to
depend more on her household investment funds. For most
Ghanaian financiers, the expected returns of long-term
investments are the dividends they receive as well as capital
gains. Failure to meet this expectation would result in the
sale of shares, which will result in the decline of the
company's share price. The drop in share price sends an
indication to prospective financiers of the poor presentation
of the business by discouraging prospective financiers from
financing both in equity stock and debt for most companies,
such a reaction will be highly undesirable since a company's
share price provides a measure of its performance.
Thus to be able to boost financier confidence and sustain
its ability to remain in business, a company must be able to
decide on a Capital Structure that best protects shareholder
wealth (Modigliani and Miller (1958).
The decision of investment funding, and its relation with
optimal risk contact, is vital to the economic performance of
every bank. Financial economies have a rich literature
scrutinizing the Capital Structure choice in quantitative
positions. The basic financial objective of every firm is to
take full advantage of the wealth of the existing owners of
the firm. For publicly held establishments, this objective
translates into maximizing the per share price of the firm's
mutual stock. (Booth et al., 2001).
In recent years, Ghana’s Presidents have been combing the
world looking for funds into the different segments of the
economy. The establishment of the stock exchange as part of
Ghana’s reform towards the development of efficient
financial system has exposed firms to more financing
options. Additionally all our real state possessed ventures are
being stripped to outside owners. This expanded support of
outside financiers has suggestion for the execution of the
stocks on the Ghana Stock Exchange.
Another mind boggling issue is how best corporations can
control profit arrangement as well as picks the right financing
mix (i. e. on ideal Capital Structure) that would adequately
and proficiently make riches in a developing nation like
Ghana's. These are important issues because a low payout
ratio may enable the business to conserve funds while a high
payout ratio may raise the demand for the company's
securities and facilitate inflow of new funds. Unfortunately,
in Ghana, most corporations have not fundamentally
investigated the focal points to be deduced in genuinely
taking a peek at their industry of operation and looking for
after a perfect Capital Structure as well as the right benefit
plan for their industry of operation.
The overall objective of this research was to examine
Capital Structure Dynamics of Listed Banks in Ghana. The
specific objectives of the research was to Examine the
significance of Bank performance on capital structure;
Examine the determinants of equity and their significance;
Examine the determinants of leverage and their significance.
Abor (2008) characterizes Capital Structure as exact
combination between equity and debt a firm uses to fund its
activities. Capital Structure is a standout amongst the most
multifaceted zones of business decision making in light of its
interrelationship with other money related choice variables
(Gitman et al., 2012). It is critical the way Capital Structure
is firmly joined with the capacity of Banks to satisfy the
cravings of their desires of their shareholders.
Gitman et al (2012) stated that poor Capital Structure
choices can produce a high cost of capital, thus lowering the
Net Present Values (NPVs) of tasks and making more of
them intolerable. Effective Capital Structure decisions can
lessen the cost of resource, results in higher NPVs and more
satisfactory projects- and thereby growing the value of the
firm.
Capital Structure's effect on the profitability of 22
organizations recorded on Ghana Stock Exchange amidst
1998 to 2002 was looked into by Abor (2005). Results
unveiled that there is a noteworthy and positive relationship
in the middle of Capital Structure and profit for equity .
Besides, he expressed that promising partnerships have more
dependence on financing through obligation and 85%being
short-term liabilities.
One of the most significant financial areas that
administrators should contemplate to increase shareholders
capital is the determination of the finest blend of financial
International Journal of Finance and Banking Research 2016; 2(5): 167-177
wealth for the firm. Capital Structure studies have
tenaciously increased after some time and still keep on
captivating the consideration of researchers with the
fundamental reason for figuring out if equity and debt blend
is real. The mix of equity and debt will decreases the cost of
capital of a firm while enlarging the firm’s significance and
this is known as optimal Capital Structure. By the way, how
associations pick the measure of equity and debt in their
Capital Structure mix remains a conundrum.
Frydenberg (2004) discussed further that, in whole and
faultless capital markets, study has presented that total firm
worth is autonomous of its Capital Structure. An optimal
Capital Structure does not exist when capital markets are
impeccable. Taxes and other market limitations are critical to
housing a progressive theory of Capital Structure.
Modifications in Capital Structure profits only stockholders
if and only if the worth of the corporation grows. Miller and
Modigliani (1958b) composed the seminal article in this field
of research.
Using an arbitrage argument the inference of M&M (1963)
proposal is that firms need to utilize extra debt to develop
esteem in connection to equity . Miller and Modigliani’s two
publications had created numerous studies that added to the
explanation of the Capital structure puzzle. If a firm can
change its market price by a clean financial procedure, the
financiers in the firm can take actions that replicate the
successive debt position of the firm. These relations would
only change the weights of a portfolio and must, in a perfect
capital market, provide zero profit. If the market remained
efficient enough to eradicate the proceeds for the financiers,
any revenue for the firm would be eradicated too. Modigliani
and Miller in their original articles Miller and Modigliani
(1958b) and Miller and Modigliani (1958a) undertook
numerous stern checks.
2. Theoretical Overview Capital
Structure
Preceding M & M theory, prevailing prepositions
stimulated that financial leverage was used by firm’s to
enrich their Firms value. Initially, Miller and Modigliani
(1958) theorized that firms worth is self-determining of its
financial structure; successively in 1963, they took into
justification the corporate tax, they highlighted the
consequences of profits of the tax shield of debt; identifying
that leverage can decrease the fee commitments associated to
corporate tax, the researchers standard that Capital Structure
is optimal at 100% liability sponsoring (as it lessens the
weighted average price of capital and exploits firm
performance and value) Miller and Modigliani (1963). They
again disputed that the Capital Structure of a firm should
constitute totally of debt because of tax deductions on
interest payments.
Modigliani and Miller (1963) wrangled about that the
Capital Structure of a firm ought to constitute totally of debt
due to duty derivations on interest installments. Yet, Brigham
169
and Gapenski (1996) discoursed that, in idea, the ModiglianiMiller model is tying. In any case, in all actuality, bankruptcy
costs is real and these expenses are straightforwardly
proportionate to the debt level of the firm. In this way, an
ascent in debt level causes a surge in bankruptcy costs. Along
these lines, they debate that that a perfect Capital Structure
must be accomplished if the expense covering benefits
conveys an ascent in debt level is equivalent to the
bankruptcy costs.
The ideas have likewise archived the compensations of
money related influence in firm support despite bankruptcy
costs sidestepping the costs of monetary anguish. These
affirmations have controlled to two winning theoretical
models by which different speculations are embedded,
namely the static trade-off model and the Pecking Order
model. Different speculations are free income theory and the
agency cost Theory.
2.1. Static Trade-Off Theory
By the trade-off theory, companies’ seek debt levels that
balance the tax advantages of additional debt against the
costs of possible costs of debt (Myers, 2001; Faulkender &
Petersen, 2006). Jensen and Meckling (1976) exp r essed
the tr ad e- o ff theo r y as t he optimal Capital Structure of
firms includes the trade-o ff among the bankruptcy costs and
agency costs, the impacts of corporate and individual taxes,
and so forth This theory expected that Capital Structure
moves towards a perfect impact which is controlled by
altering the corporate appraisal saving estimation of
commitment and the costs of monetary misery. This idea has
been made in various papers. For example DeAngelo and
Masulis (1980) and Bradley et al. (1984). In any case, Mill
operator (1977) scrutinized their thought; he debated that
static trade-off model derives that firms ought to be to a great
degree adapted than they really are, as the expense reserve
funds of debt seem tremendous while the costs of financial
pain seem immaterial. Klaus and Tzenberger (1973) showed
that considering the duty points of interest of debt, optimal
Capital Structure includes debt funding. Ross (1977) and
Leland and Pyle (1977) level headed discussion that debt can
be cherished as a ploy for indicating a firm’s worth.
2.2. Pecking Order Theory
As expressed by the Pecking Order theory, firms will
obtain as opposed to radiate equity , when inside created
assets streams are inadequate to record capital overheads
(Myers 2001). As expressed by Watson and Head (2007), the
Pecking Order theory drives in opposition to the idea that
firms having unmistakable combination of debt and equity
financing abates their rate of capital. This theory postulates
that when an enterprise is considering financing its longstanding investment, it has all around portrayed solicitation
of slant concerning the wellsprings of record open to it. Fama
and French (2002) and Meyers (1984) depict an
organization's debt condition as the aggregated results of
before investment and capital planning decisions.
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Anthony Kusi et al.: Capital Structure Dynamics of Listed Banks in Ghana
This theory indicates that firms will back their new
funding first by using inward fund as their source of asset.
On the off chance that inner assets are lacking or difficult to
reach they will proceed onward to the utilization of debts that
are sheltered, then debts that are dangerous and finally equity
as their wellspring of asset. This implies the Pecking Order
theory recommends beneficial firms with high profit ought to
utilize less debt in their Capital Structure than those with low
income earnings (Myers 1984; Myers & Majluf, 1984).
Myers & Majluf (1984) wrote that asymmetry information
affects the Capital Structure by controlling access to external
finance. Baskin (1989) affirmed that information asymmetry
do not only limits firm's capability of equity financing, but
also restrict access to Retained Earnings as finance source
because firms must pay dividends as a signal to both current
and prospective shareholders and cannot be adjusted for
financing requirements. Another influence of the Pecking
Order theory according to Baskin (1989) is a direct cost. The
cost of internal financing is absolutely less as there is no
dividend payment for the use of Retained Earnings, which
successively result in reduced taxes and commissions and on
dividends.
Baskin (1987) tested the Pecking Order hypothesis and
documented that firms borrow because they need funds and
that bankruptcy cost does not restrict borrowing. Once
information asymmetry places restrictions on equity
financing, debt tends to become the principal incremental
source of finance. Frank and Goyal (2003) stated that
Pecking Order theory is amongst the dominant theory of
corporate leverage, due to adverse selection; firms favor
inside finance as opposed to outside finance when funds are
required. Rao et al. (2007) analyzed the debt ratio and
defined whether an optimal debt ratio subsists or not.
Optimal debt ratio is usually defined as the factor that
diminishes the cost of doing business for the firm, while
getting the most out of the worth of the firm. Furthermore,
optimal debt ratio makes the most of the profitability of a
firm according to Rao et al. (2007).
2.3. Free Cash Flow Theory
This theory conditions that high leverage, when firm’s
working cash flow is further than its gainful investment
prospects, will cause an increase in firm's value
notwithstanding its threat of financial distress (Myers,
2001).
2.4. Agency Cost Theory
The agency theory originally explained by Berle and
Means (1932) also offers theory on Capital Structure choice.
From the theory, agency conflicts ascend from the deviation
of benefits among investors (principals) and administrators
(agents) of firms. The key duty of administrators is to
manage the firm to yield return to shareholders thus growing
the return statistics and cash flows (Elliot and Elliot, 2002).
This theory was additionally exhibited by Jensen and
Meckling (1976), stating that firm’s Capital Structure
ascending from agency costs of interest conflicts between
different stakeholders participation. These two researchers
identified two types of conflict of interest, namely
i. Conflict of interest between administrators and
shareholders, and
ii. Conflict of interest between shareholders and debtors
of firm.
According to Jensen and Meckling, by creating a balance
between profits of debt, such as tax benefits and agency costs
of debt we can achieve to an optimal Capital Structure
(Izadinia & Rasayan, 2010).
3. Empirical Evidence and Hypothesis
Development
3.1. Leverage
The term operating leverage refers to the extent to which
fixed operating costs are part of a firm’s total operating costs,
Watson and Head (2007). Stulz (1990) wrote that for
leverage to be relevant for the worth of a firm there has to be
case that no clever arbitrageurs can profit from such a
situation. Primarily, if market failures are present, tax
consideration, asymmetric information, transaction costs and
bankruptcy costs factors must be present for leverage to
matter. Furthermore, the existence of a possibility to make a
trade of the firm with the sub-optimal Capital Structure for
the firm with the optimal Capital Structure must be absent.
Given the watched contrasts in the organization of
liabilities, before undertaking any examination of influence,
it is fitting to characterize what we mean by this term.
Obviously, the degree of leverage and the most significant
measure relies on upon the investigation's goal. Aghiori and
Bolton (1992) focused on leverage as a way of shifting
control in bad periods from the hands of investors (or their
fiduciaries) to the hands of debtors (or their fiduciaries) Here,
the imperative inquiry is whether the firm can meet its settled
overheads, and thusly, a stream measure indistinguishable to
the interest scope proportion is more applicable. As opposed
to investigating every conceivable theory and their related
measures of leverage. The agency problems connected with
debt Jensen and Meckling (1976), Myers (1977) to a great
extent identify with how the firms has been financed in the
past and therefore on the near cases on firm esteem held
equity and debt. Here, the appropriate quota is probably the
stock of debt comparative to firm price.
It must be noted that adding of more fixed costs raises the
volatility of net returns to the common stockholders and
greater volatility means greater dispersion in their returns or
increased risk, Mazzeo (1992).
3.2. Asset Tangibility
The natural surroundings of a firm’s assets influence
Capital Structure. Tangible assets are less subject to
information asymmetries and ordinarily they have a more
noteworthy quality than Intangible resources in the occasion
International Journal of Finance and Banking Research 2016; 2(5): 167-177
of liquidation. Also, moral hazard risks are abridged when
the business offers tangible assets as security, since this
consist of a positive sign to the creditor. Banks can auction
these benefits in the occasion of default. Hence, the trade-off
theory foretells a positive association among measures of
leverage and the section of tangible assets (Aviral and
Raveesh, 2015).
The degree to which the firm's focal points stay
considerable should impact the firm taking more huge
bankruptcy regard (Titman and Wessels, 1988; Harris and
Raviv, 1991). Bradley et al. (1984) affirm that firms that
place energetically in unmistakable assets in like manner
require more prominent budgetary impact in light of the fact
that they secure at lesser loan fees if their debt is ensured by
such assets. It is trusted that debt may be everything except
expeditiously used if there are strong focal points for serve as
security (Wedig et al., 1988).
Booth et al. (2001) Suggested that the compatibility
between generous settled assets and debt funding is
recognized by adding to the structure of the debt. In such
condition, the level of generous settled assets may help firms
to secure more long-term debt; however the office issues
might turn out to be more serious with the more unmistakable
altered resources, in light of the fact that the data uncovered
about future benefit is less in these organizations. If so, it is
liable to locate a positive correlation between tangible fixed
assets and debt ratio. From the above, it can be hypothesized
that:
H1: Asset Tangibility is positively related to Bank’s equity
and leverage
3.3. Size of the Bank
Size is seen as a factor of a bank’s Capital Structure
Bigger Banks are more enhanced and consequently have
lesser fluctuation of income, building them to endure great
obligation proportions (Wessels, 1988; Titman and Wald,
1999; Castanias, 1983). Minor Banks, then again, may
discover it generally all the more excessive to determine
information
asymmetries
through
moneylenders,
consequently, may present lower obligation proportions
(Castanias, 1983). Creditors to bigger companies will
probably get reimbursed than moneylenders to littler firms,
decreasing the organization expenses connected with
obligation. Hence, bigger banks will have greater obligations.
Alternative clarification for littler firms having lesser
obligation proportions is if the comparative insolvency costs
are an opposite capacity of banks (Titman and Wessels,
1988). The trade-off theory expects a transposed correlation
between size and the likelihood of liquidation, i.e., a positive
association between size and leverage. Nonetheless, the
Pecking Order theory of the Capital Structure expects an
inverse association between size and leverage. A bigger
corporation displays a growing liking for equity comparative
to debt. Based on these assertions, we can hypothesis that:
H2: Size of the Bank is positively related to its equity and
leverage
171
3.4. Growth Opportunities
Marsh (1982) stated that corporations with high
development will catch moderately higher debt ratios. On
account of little firms with more focused proprietorship, this
was likewise bolstered by Heshmati (2001), that, high
progressive corporations will require more external funding
and ought to exhibit greater leverage.
However, the empirical evidence appears indecisive.
Various scholars established positive relationships amongst
growths opportunities and leverage (Kester, 1986; Titman
and Wessels, 1988; Barton et al., 1989). Further suggestion
submits corporation’s with greater growth opportunities takes
into the use of a smaller amount of debt (Kim and Sorensen,
1986; Rajan and Zingales, 1995; Roden and Lewellen, 1995;
Al-Sakran, 2001) instituted out that imminent progress is
positively related to leverage and long-term debt.
It’s additionally imperative that the dividend payout of the
firm might influence the optimal select of capital in funding
growth. For the most part, firms with small dividend payout
have the capacity to hold more returns planned for savings.
Such businesses would along these lines rest on inside
created stores and less on debt funding. On the other hand,
firms with great dividend payout are inclined to be
subordinate on debt in solicitation to subsidize their
improvement prospects. It is therefore hypothesized that:
H3: Growth Opportunity is negatively associated with
Bank’s equity and Lever
3.5. Non-Debt Tax Shield
The debt tax shield has roused spans in years of
deliberation concerning a corporation’s estimation and the
price of capital. In 1963, Modigliani and Miller first
postulated that the tax benefits of debt swells a corporations’
worth and reduce the cost of consuming debt capital. In 1977,
Miller countered that corporations pass out the tax aids of
debt to investors through high intrigue rates to remunerate
them for the individual tax detriment of debt. Others have
suggested that the money related trouble costs of debt offset a
minimum of the tax benefit (see, e.g., DeAngelo and Masulis,
1980). Hence, the corporation’s estimation and Capital
Structure’s repercussions of the debt tax shield are imprecise.
It can therefore be hypothesized that;
H4: Non-debt tax shield is positively related to Bank’s
equity and leverage.
3.6. Dividend Policy
Dividend policy the firm’s amount of cash it thinks is
necessary and appropriate to pay shareholders Ross (2007).
The dividend payout ratio is an additional aspect that might
have an impact on companies leverage. Starting with the
agency and exchange cost contention, organizations with an
awesome payout extent will have smaller agency costs of
equity , which reinforces organizations to expend additional
equity financing Rozeff (1982). There would exist a negative
relationship since dispensing dividends is an indication of an
anticipated development of approaching income and this is a
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Anthony Kusi et al.: Capital Structure Dynamics of Listed Banks in Ghana
sign to weakening in the cost of equity subsidizing (Antoniou
et al., 2008). The customary measure of the benefit payout
extent is the extent of benefits to net income, from the above,
it can be hypothesized that;
H5: Dividend policy is inversely related to Bank’s equity
and leverag
4. Data and Methodology
This is because panel data involves the combining of
observations on a cross section of entities over numerous
time periods and enables identification of effects that are
simply not obvious in pure time-series studies. The panel
regression equation varies from a regular time-series or cross
section regression by the insertion of the double subscript
attached to each variable. The general form of the panel data
model can be specified more compactly
4.1. Data Source and Sample
Seven (7) Banks listed on the Ghana stock exchange were
selected for this study. The data sources used for the research
were financial statements of the selected companies’ for the
period. The balanced sheet and profit and loss accounts for
the years in question was used. References were also made to
the notes of the numerous accounts for indept explanation as
well as secondary data from the listed banks in the Ghana
stock exchange. The audited financial statement of the listed
banks was used so as to increase the reliability and validity of
the findings and conclusions. Further information on each
selected Bank's Capital Structure, Return on equity , dividend
policy and other relevant information were obtained through
Data on Debt- to- equity ratio (Capital Structure), Return on
equity and benefit prior and then after tax of chosen banks
from the Ghana Stock Exchange, the individual companies
and from statistical publications.
The data was taken from annual financial and income
statements which cover an 8 year period, thus 2005- 2012.
4.2. Variable Construction
Following (Remmers et al., 1974; Cassar and Holmes,
2003), the 2 dependent variables are equity and leverage.
Equity is the bank’s total asset less their total liabilities.
Leverage can be defined as the portion of the bank’s total
debt repayable within one year or bank’s total debt repayable
beyond one year.
The explanatory variable is performance measured by a
ratio of return on asset (ROA) to return on equity (ROE). It
might be useful to connect with various measures instead of
pick a solitary one depending on subjective suppositions
about their suitability. Case in point Kuznetsov and
Muravyev (2001) utilized work efficiency, productivity, and
Tobin's Q as estimations of performance. In this study the
researcher deliberated two performance proxies namely
return on assets (RoA) and Return on Equity (RoE).
ROA measured by the ratio of net income to total asset.
Return on Equity (ROE) calculated by the banks profit after
tax divided by the net worth of the bank.
The control variables are included because they also have
some effect on the dependent variables, but they are not the
subject of interest in the study. These are asset tangibility,
size, growth opportunity, Non-debt tax shield and dividend
policy.
4.3. Methods of Data Analysis and Hypotheses Testing
The study is carried out using a panel data framework.
The subscript i denotes the cross-sectional measurement
and t signifies the time-series element. The variable Yit
denotes the dependent variable in this model. Xit contain the
independent variable which is constant overtime t and
specific to the discrete cross-sectional unit i.
Pearson correlation and estimation of panel regression
models for hypotheses testing were utilized and analyzed.
The results were built on statistical centrality or insignificant
coefficients. For this tenacity, after determining the technique
that shows the most accurate estimate, by the utilization of tstatistic, the specialist test the estimation coefficients of
independent variables in the regression models utilized for
the hypotheses by the utilization of:
H0: β = 0
H1: β ≠ 0
H0 hypothesis implies that the independent variable
coefficient is zero which therefore implies there exist no
relationship among the adjustments in the tested dependent
variable and independent variables. H1 is additionally
meaning the association among changes in independent
variables and dependent variable. The hypotheses are tested
in a 5% mistake level. 'In the event that the p value is less
5%, then, the correlation is confirmed at 95%confidence
level and otherwise is rejected.
To decide between fixed or random effects, a Hausman test
was conducted where the null hypothesis is that the preferred
model is random affects vs. the alternative the fixed effects
(Green, 2008). It basically tests whether the unique errors
( ) are correlated with the regressors, the null hypothesis is
they are not.
Models Specification
We analyzed two models by way of avoiding a problem of
multicollinearity in the estimation models. From the
econometric model by Miyajima et al. (2003), because their
model presents itself as the most appropriate, we estimate the
following specific panel regression model:
=
+
&
+ , =
+
&
Perf +
' + () * +
+
!
+
"
#$% +
(1)
Perf +
+
' + () * + +
!
+
"
#$% +
(2)
From the model specification, the following equations are
estimated, where;
Eqt- equity of firmi in year t,
Lev-Leverage of firm i in year t,
Perf- Performance of firm i in year t,
International Journal of Finance and Banking Research 2016; 2(5): 167-177
Tang-asset tangibility ration of firm i in year t,
Size-size of firm i in year t,
Grow-growth opportunities of firm i in year t,
Tax-non debt tax shield of firm i in year t,
Div-dividend policy of firm i in year t.
173
and random effect. The fixed effect had a p-value of 24.27%
while the Random effect had a P-value of 0.80% showing
that the random effect is significant and presents the output
for Equity using the Random effect.
Table 3. Equity.
Table 1. Measurement of Variables.
Code
Variable name
Dependent variables
Eqt
equity
Lev
Leverage
Independent variable
Perf
Performance
Control variables
Tang
Assets tangibility
Size
Calculating method
Total asset-Total Liabilities
Total debt/ Total Asset
Return on asset/return on equity
firm size
Grow
Growth opportunities
Tax
Div
Non debt tax shield
Dividend policy
Profit before tax/ total assets
Natural logarithm of total assets of the
firm
change in the natural logarithm of total
assets of the firm
total asset/tax payment
Dividend ratio/ net income
These definitions are in line with previous studies by Cassar
and Holmes, 2003; Esperança et al., 2003; Hall et al., 2004;
Sogorb-Mira, 2005). All the variables used in this study are
based on book value in line with the argument by Myers (1984)
that book values are proxies’ for the value of assets in place.
5. Empirical Results
5.1. Descriptive Statistics
Table 2. Summary.
Variable
equity
leverage
perf
tang
size
grow
tax
div
Observation
56
56
56
56
56
56
56
56
Mean
1.09e+08
.9838564
.6321214
.044725
17.12038
.6883929
195.5144
.2579768
Std. Dev.
3.22e+08
1.143439
1.462195
.0291979
3.557022
1.312046
406.9835
.1836789
Minimum
-538965
.0008698
.0028
.0053
11.2378
-1.8203
17.0593
0
Maximum
2.39e+09
9.2658
6.3384
.2102
21.8125
5.1917
2852.142
.8103
EQUITY
Perf
Tang
Size
Grow
Tax
Div
const
COEFFIENT
3.16e+07
1.68e+09
3.63e+07
-2.85e+07
42033.2
-4.12e+08
-4.90e+08
STANDARD ERROR
3.06e+07
1.56e+09
1.24e+07
3.11e+07
104739.8
2.27e+08
2.29e+08
P-VALUE
0.301
0.280
0.003*
0.361
0.688
0.070**
0.033
Source: Author’s computation
*Indicates 5% significance figure
**indicates 10% significance figure
Equity has a positive relationship with Performance, Asset
Tangibility, and Size of the firm and Non-debt tax shield.
This implies that as performance, asset tangibility and size of
the firm increases, then the firms’ worth also increases. This
result indicated that a high performing firm will have its
equity greater than a low performing firm.
Equity is also negatively related with dividend and the
growth opportunity of the firm. This implies that a bank with
low equity has the opportunity to grow higher than a bank
with high equity. A bank pays dividend out of its worth so
when the dividend is paid, the bank’s worth reduces.
At 95% confidence interval, we can clearly say, Size of the
Bank is highly significant and therefore a major determinant
of equity of listed banks in Ghana.
5.2.2. Leverage Analysis
The study performed a panel analysis using a fixed effect
and random effect. The fixed effect and the random effect
both gave a p-value of 0% so the Hausman Test was run. The
test failed to meet the asymptotic assumptions of the
Hausman test, therefore, the study choose the random effect.
Table 4. Leverage.
Source: Author’s computation
The summary of the statistics used in this empirical study
is presented. The mean and standard deviation of all the
variables over the sample period. It also reports the minimum
and maximum score of both the dependent and the
independent variables. The mean value of Equity is 1.09 with
maximum and minimum score of 2.39 and -538965
respectively. The Mean, maximum and minimum score of
leverage is 0.98, 9.2658 and.0008698 respectively.
Performance had a mean score of 0.63, maximum score of
6.34 and a minimum score of 0.0028. The Mean, of Asset
tangibility, size, Growth, Non-debt tax shield and dividend
ratio is 0.044, 17.12, 0.688., 195.54 and 0.257 respectively.
5.2. Regression Results and Discussion
5.2.1. Equity Analysis
The study performed a panel analysis using a fixed effect
LEVERAGE
Perf
Tang
Size
Grow
Tax
Div
const
COEFFIENT
-.2472246
37.00682
.0473832
-.038958
.0003365
.5649112
-1.510914
STANDARD ERROR
.0682926
3.478571
.0276039
.0695303
.0002338
.5073069
.5111185
P-VALUE
0.000*
0.000*
0.086**
0.575
0.150
0.265
0.003
Source: Author’s computation
*Indicates 5% significance figure
**indicates 10% significance figure
Leverage has a positive relationship with asset tangibility,
size of the firm, Non-debt tax shield and dividend policy. As
asset tangibility, Non-debt tax shield and dividend policy
increases, the leverage (total debt) of the Bank increases.
Performance and asset tangibility was highly significant in
determining a listed Bank’s leverage.
Size of the firm’s coefficient for leverage is positive and
174
Anthony Kusi et al.: Capital Structure Dynamics of Listed Banks in Ghana
significant at 90 % confidence interval, the outcomes is in
track with Harris and Raviv (1991) and Rajan and Zingales
(1995). The outcomes recommend that bigger banks with
greater assets’ tangibility employ more leverage to influence
and accomplish the tax benefits of debt, as bigger banks face
fewer risk of bankruptcy.
The results showed that performance and growth
opportunity has a negative relationship with leverage. This is
in line with the studies by to Titman & Wessels (1988), Rajan
and Zingales (1995), Harris & Raviv (1991), Ghosh et al.
(2000) and Booth et al (2001) with an with a reverse
relationship between growth and leverage.
The results indicate a positive relationship amongst tax and
leverage. The positive coefficient could be attributable to the
added tax levied on banks. In Ghana, banks are taxed a
special tax and the tax rise would be allied with the amassed
debt capital. This was affirmed by Amidu (2007).
The positive coefficient of dividend policy, show that
when a bank has a policy to pay profit, it impacts on its
performance. This is in accordance with the confirmation of
profit hypothesis by John and William (1985) and Miller and
Rock (1985) that dividend policy influences a firm share
price.
The Performance was only significant in determining the
leverage of the listed banks. There was a negative
relationship between the performance of a bank and its
leverage (Debt). It implies that an increase of 100% in
leverage was due to a fall of 24.72% in performance. Banks
which perform better usually have low debt stock. Logically
it implies that when Banks perform better, there earn more
revenue and therefore plough back their profit so they tend to
borrow less.
Size was only a determinant of equity. There exist a
positive association between size and equity. Intuitively, as
the size of a bank increases, the equity of that bank increases.
Therefore, the size of a bank does not only influence bank
equity positively but also significantly.
Dividend policy was also significant at 90% confidence
interval.. However, there was a negative relationship between
equity and dividend policy. Intuitively, since dividend was
paid out of a banks profit, an increase in dividend adversely
affected the worth and equity of the bank.
Performance and asset tangibility of a bank are the highly
significant determinants of the leverage of a bank. A 5%
confidence interval indicate a highly significantly positive
association between Asset Tangibility and leverage and a
highly negative significance with performance the
significantly positive regression coefficient for total debt.
Also, the negative coefficient of performance suggests that
Performing Banks depends less on debt as their main
financing option. Therefore, this hypothesis shows that there
exist a significant but negative correlation among leverage
and a bank’s performance. The results of this speculation is
unfaltering with the examination consequences of Onaolapo
and Kajola (2010), Houang and Song (2006), and Zeitun and
Tian (2007), yet is changing with the exploration aftereffects
of Aburub (2012).
The significantly and positive regression coefficient
association between total debt and asset tangibility implies
that an increase in the debt position is allied with an increase
in asset tangibility. Thus, the higher the debt the greater
tangible asset, which confirms that greater assets’ tangibility
is allied with higher leverage. This result is fortified likewise
by the audit of Measurements New Zealand (2004), that more
than 70% of New Zealand Banks use debt funding. The huge
result for tangibility in elucidating debt settles that guarantee
is of significance for banks to secure utilization of debt.
6. Conclusion and Recommendation
This study examines capital structure Dynamics of listed
Banks in Ghana from 2005 to 2012 consisting of a panel
model composing of fixed and random effects. In this study
from Asset Tangibility (Tang), Size of the Bank (Size),
Growth Opportunity (Grow), Non-debt tax shield (Tax),
Dividend Policy (Div) as constituents of capital structure and
the financial performance of Banks measured as return on
assets (ROA) divided by return on equity (ROE) as means of
accessing the banks Performance.
The elementary remark made was that the mean of the
capital structure of the Banks recorded on the Ghana Stocked
Exchange was 98% over the period for assessment
suggesting that banks listed in Ghana are extremely geared.
This implies that for ₵100.00 available for operating a
business, ₵98.00 would be financed by debt and the
remaining ₵2.00 by equity. This therefore can be attributed to
banks over reliance on leverage as an outcome comparatively
due to high Central Bank’s Lending rate and the low level of
activities of bond market in Ghana.
Furthermore, the results of this study have given some
comprehension on the capital structure of Ghanaian Banks.
The subject of the mix of debt and equity is an essential
strategic funding choice that banks need to make. Obviously,
the Static trade off theory seems to overwhelm the Ghanaian
capital structure story of listed Banks this implies that
profitable and performing Ghanaian listed Banks use more
debt because they operate based on external funding.
Also, empirical evidence from this studies suggest that,
Performance, Size of a Bank and Asset tangibility are the
most important variables that influence Banks capital
structure in Ghana.
Recommendations
Based on the findings of this research, some
recommendations were made as follows:
Government should pursue policies to bring down the rate
of depreciation of the cedi, as well as reduce the level of
inflation against that of the developed countries to prevent
the banks from being highly geared.
Since performance is significant in determining leverage,
lending firms and banks should be wary and cautious when
borrowing to a highly geared firm since they don’t perform
better and might not be able to pay
International Journal of Finance and Banking Research 2016; 2(5): 167-177
Also, the government must also endeavor to promote the
reduction of the Bank of Ghana's Lending Prime Rate so that
the banks can easily lend among themselves.
Furthermore, it is very rewarding when a business
organization is able to reach its optimal capital structure and
is therefore significant for financial managers to pursue the
exact optimal capital structure that will contribute to their
shareholders maximizing returns on their investments.
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