ABSTRACT
The central objective of this study is to assess the effect of capital structure on performance of OMCs in Ghana. The data sample consists of six oil marketing companies that have been in continuous existence from 2010-2015. The study employed panel regression models to examine the relationship between capital structure and performance of OMCs in Ghana.
The results of this study show that the analysis of leverage and firm performance relationship produces mixed outturns. The leverage has a positive relationship with return on equity but relates inversely with return on asset. These findings found support for both the bankruptcy cost and tax benefits arguments.
The study results also suggest that the size of the firm has positive and significant effects on return on assets (ROA) and return on equity (ROE). The larger firms have easier access to external funds and are most likely able to meet their investment needs thus increasing their profitability. The results of the regression analysis show that the liquidity ratio produces negative effects on return on asset. This finding confirms the liquidity and profitability trade off theory.
CHAPTER ONE INTRODUCTION
Background of Study
Capital structure can be described as the blend of debt and equity which constitutes the aggregate capital of firms (Gatsi & Akoto, 2010). In broad terms, the capital structure of a firm constitutes its net worth, that is its total assets less the amount owed to its creditors (Abor, 2005; Onaolapo & Kajola, 2010). In company law, capital represents a firm’s issued or paid up capital. The ability to select the right mix or proportions of equity and debt can assist the firm in solving some of the difficulties it faces as it seeks to maximize its stakeholder returns (Detthamrong, Chancharat, & Vithessonthi, 2017). But the extent of debt to equity adopted by corporate managers remains a strategic choice (Gatsi & Akoto, 2010). Ever since the seminal works of Modigliani and Miller (1958), literature within the framework of capital structure, both in developed and developing countries, has gained a lot of attention and/or discussion.
For instance, Abor (2005), in his study of Ghanaian firms suggested that decisions relating to capital structure are vital for any business enterprise with the intention of ensuring maximum returns to the various parts of the organisation. He further explained that capital structure decision is important because it gives firms the capability to deal with its competitive market situations. The debt of a company consists of an amount borrowed either from the government, statutory financial corporations, banks and individuals, and other financial institutions which are repayable over a period of time with an associated cost. Equity consists of ordinary share capital, share premium, reserves, undistributed profits, preference shares and discretionary provision or contingency fund.
In Ghana, companies within the non-financial firms require capital mostly to establish or procure production facilities, property and equipment to enter into new business ventures (Amidu, 2007a). Funds are also required to finance their working capital requirements, pay a dividend as well as make provision for other expenses. For these investments and expenses to maximize the firm value, the appropriate capital structure choice must be strategically made.
