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.

CHAPTER ONE
INTRODUCTION
For most firms, forming an optimal capital structure (equity and debt) is key to business survival and continuity. Previous studies on the effect of these two components of capital structure have produced mix findings. For some studies, the effect of capital structure on firm value have been found negative whereas in other studies, the effect of capital structure on firm value has been found positive. Also, other empirical literature on the effect of capital structure on firm value suggests that the effect is felt beyond and below certain thresholds. This study extends this line of research by testing the effect of capital structure on the firm value of listed manufacturing firms in Ghana. Given the contentious nature of the relationship between capital structure and firm value in the finance literature, the research problem was primarily on how capital structure affects firm value of listed manufacturing companies in Ghana. The outcome of the study would contribute to both theory and practice of knowledge. The findings of the study contribute to the extant literature on the effect of capital structure on firm value and future studies may find it useful. The practical implication of the study consists in the fact that firms would find knowledge of the effect of capital structure on the value of firm beneficial which ultimately will help in the financing decision of firms.

Background to Study
In their seminal works, Modigliani and Miller (1958 & 1963) as cited in Ogbulu and Emeni (2012), demonstrate that in a frictionless world, financial leverage is unrelated to firm value but in a world with tax-deductible interest payments, firm value and capital structure are positively related. Miller (1997) extended this line of thinking by incorporating personal taxes in the analysis and consequently demonstrates that optimal debt usage occurs on a macro level but does not exist at the firm level. Interest deductibility at the firm level is offset at the investor level. Modigliani and Miller (1963) as cited in Ogbulu and Emeni (2012) in addition made two propositions under a perfect capital market condition. The first proposition is that the value of a firm is independent of its capital structure. Their second proposition states that the cost of equity for a leverage firm is analogous to the cost of equity for an unleveraged firm plus an added premium for financial risk.

Yet, other theories such as the trade-off theory (Myers, 1984), pecking order theory (Myers & Majluf, 1984) and agency cost theory (Jensen & Meckling, 1976) argue that if capital structure decision is irrelevant in a perfect market, then imperfection which exists in the real world may be adduced for its relevance. Such imperfections include bankruptcy costs (Kim, 1998), agency cost (Jensen & Meckling, 1976), gains from leverage-induced tax shields (De Angelo & Masulis, 1980) and information asymmetry (Myers, 1984). Consistent with this line of argument, Pandey (2004) contends that the capital structure decision of a firm influences its shareholders, return and risk. As a result, the market value of its shares may be affected by the capital structure decision. Obviously, the objective of a firm should therefore be directed towards the maximization of its value by examining its capital structure or financial leverage decision from the point of its impact on the firm value.

Against this background, the proposed research study will seek to examine how the various components of capital structure namely the amount of equity and the amount of debt used by a firm affects its market value drawing on the case study of listed manufacturing companies in Ghana.

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Item Type: Ghanaian Project Material  |  Attribute: 64 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH110 ($20)  |  Delivery: Within 30Mins.
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