ABSTRACT
The purpose of this paper is to demonstrate and recognize the link between debt financing and performance and choosing appropriate measures to evaluate and analyze the financial status of State-Owned Enterprises. The major aim is to determine the level of debt financing among State- Owned Enterprises in Ghana. The study investigated the relationship between debt financing and performance of 22 State-Owned Enterprises (SOEs) over a four-year period (2014 – 2017) using regression model and Pairwise correlation matrix of the various variables utilized in the study.
Many measures of firm performance such as a firm’s profitability was 0.19% for the sampled SOEs. This shows that profitability of SOEs has been declining. In addition, efficiency of state- owned enterprises has been declining over the study period. This is evidenced by the decline in the total asset turnover ratio over the period.
Key words: Debt Financing, Financial Performance, State-Owned Enterprises, Pairwise Correlation Matrix
CHAPTER ONE
INTRODUCTION
Research Background
Financial Management is very crucial to the survival and growth of every business. To manage the finances of businesses, managers are to undertake three important decisions. These decisions are; which long term assets should the business engage in (capital budgeting), how are these long-term assets going to be financed (capital structure) and finally how is the business going to finance its daily activities (working capital management). Although all three decisions are very important, one which gives managers of firm headache and often result in conflict between managers and owners is the capital structure decision. A poor capital structure decision will also affect capital budgeting of the firm. It is therefore important that good capital structure decisions are taken to help in the sustenance and growth of businesses (Adesina, Nwidobie and Adesina, 2015).
The financing of a company’s assets is referred to as capital structure. This remains as the proportionate connection between the financing of debt and equity of an entity. Equity financing refers to the raising of funds through sale of shares or common stocks. Equity investors are owners of the company. Debt financing on the other hand is the raising of capital by selling debt instruments. In Debt financing, the providers of funds anticipate receiving the amount provided plus interest at a maturity date. These providers do not become owners of the company. Debt financing comprises of short-term debt and long-term debt. The duration of a short-term debt is one year or less and in the balance sheet of any organization, it is noted as a current liability. In contrast, the duration of a debt in a long period is more than one year and bonds is an example of such debt (Scherr and Hulburt, 2001).
Modigliani and Miller (1958) are of the view that debt has no effect on the value of the firms, hence the theory of corporate finance has since developed several hypotheses about the determinants of financing decisions. This difference in the connection between the debt financing and performance gives us a curiosity to check the relationship of debt financing and the firm’s performance of State institutions in Ghana. Even with the made known inadequacies and unfortunate performance of SOEs (Boko and YuanJian, 2011), convincing indication reveals that state institutions are still important. The significance and admiration of the state institutions are more relevant in countries which are still developing, especially Sub-Saharan Africa where there are state institutions operating in every sector of the economy. (Kikeri and Kolo, 2006). It is because of the central role state institutions paly in these countries that makes it important to comprehend the various factors that necessarily influence their performance, but it continues to be a less focused area for research in organizational science.
