THE EFFECT OF FINANCIAL LEVERAGE ON PROFITABILITY: AN EMPIRICAL ANALYSIS OF RECAPITALIZED BANKS IN GHANA
Keywords:
Leverage, Bank Size, Profitability, Random Effects, Fixed Effects, Ghana.
Abstract
In this study, we examine the impact of financial leverage on profitability of recapitalized banks in Ghana over the period 2008-2017. Based on the random effects and fixed effects estimation strategies, our findings reveal that leverage exerts a significant negative effect on banks’ profits regardless of the proxy of profitability. This provides empirical support for the pecking order theory. The results also establish that bank size positively and significantly enhances profitability. In light of our findings, we conclude that financial leverage is detrimental to banks' profit growth in Ghana.
JEL Classification Codes: G21, G30.
References
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Akber, S. M. (2019). Influential Factors Responsible for Profitability: A Technical Study on Commercial Banks in Bangladesh. International Journal of Accounting & Finance Review, 4(2), 22-28.
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Anafo, S. A., Amponteng, E., & Yin, L. (2015). The impact of capital structure on profitability of banks listed on the Ghana Stock Exchange. Research Journal of Finance and accounting, 6(16), 26-34.
Anthony, H. (2013). Capital Structure and Profitability of Selected Listed Non-financial Firms in Ghana. International Journal of Business and Social Sciences, (2), 1-30.
Awunyo-Vitor, D., & Badu, J. (2012). Capital Structure and Performance of Listed Banks in Ghana. Global Journal of Human Social Sciences, 12(5), 57-62.
Azhagaiah, R., & Gavoury, C. (2011). The Impact of Capital Structure on Profitability with Special Reference to IT Industry in India. Managing Global Transitions: International Research Journal, 9(4), 371-392.
Batten, J., & Vo, X. V. (2019). Determinants of bank profitability—Evidence from Vietnam. Emerging Markets Finance and Trade, 55(6), 1417-1428.
Bezawada, B. (2020). Corporate Governance Practices and Bank Performance: Evidence from Indian Banks. Indian Journal of Finance and Banking, 4(1), 33-41.
Birru, M. W. (2016). The impact of capital structure on financial performance of commercial banks in Ethiopia. Global Journal of Management and Business Research. 16(8), 44-52.
Bobakova, V. (2003). Possibilities of the increasing of the profitability of a commercial bank. Biatec, 11(4), 26-29.
Chechet, I. L., & Olayiwola, A. B. (2014). Capital structure and profitability of Nigerian quoted firms: The agency cost theory perspective. American International Journal of Social Science, 3(1), 139-158.
Davydenko, A. (2010). Determinants of bank profitability in Ukraine. Undergraduate Economic Review, 7(1), 2.
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307-327.
Dietrich, A., & Wanzenried, G. (2014). The determinants of commercial banking profitability in low-, middle-, and high-income countries. The Quarterly Review of Economics and Finance, 54(3), 337-354.
Echekoba, F. N., Egbunike, C. F., & Ezu, G. K. (2014). Determinants of bank profitability in Nigeria: Using Camel Rating Model (2001–2010). IOSR Journal of Business and Management, 16(9), 44-50.
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Goyal, A. M. (2013). Impact of capital structure on performance of listed public sector banks in India. International journal of business and management invention, 2(10), 35-43.
Habib, H., Khan, F., & Wazir, M. (2016). Impact of debt on profitability of firms: Evidence from non-financial sector of Pakistan. City University Research Journal, 6(1), 70-80.
Hasan, M. S. A., Manurung, A. H., & Usman, B. (2020). Determinants of Bank Profitability with Size as Moderating Variable. Journal of Applied Finance and Banking, 10(3), 153-166.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society, 46(6), 1251-1271.
Hoque, M. A., Ahmad, A., Chowdhury, M. M., & Shahidullah, M. (2020). Impact of Monetary Policy on Bank’s Profitability: A Study on Listed Commercial Banks in Bangladesh. International Journal of Accounting & Finance Review, 5(2), 72-79.
Islam, M. A., & Rana, R. H. (2017). Determinants of bank profitability for the selected private commercial banks in Bangladesh: A panel data analysis. Banks & bank systems, 12(3),179-192.
Kartikasari, D., & Merianti, M. (2016). The effect of leverage and firm size to profitability of public manufacturing companies in Indonesia. International Journal of Economics and Financial Issues, 6(2), 409-413.
Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: empirical evidence from European banking sector. Journal of financial reporting and Accounting, 14(1), 86-115.
Messai, A. S., Gallali, M. I., & Jouini, F. (2015). Determinants of bank profitability in Western European Countries evidence from system GMM estimates. International business research, 8(7), 30-42.
Minnema, J., & Andersson, A. (2018). The relationship between leverage and profitability: A quantitative study of consulting firms in Sweden, Dissertation, Umeå University, Sweden.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of finance. American Economic Review, 48(3), 291-297.
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American economic review, 433-443.
Musah, M., & Kong, Y. (2019). The association between capital structure and the financial performance of non-financial firms listed on the Ghana Stock Exchange (GSE). International Journal of Research in Social Sciences, 9(5), 92-123.
Mwangi, L. W., Makau, M. S., & Kosimbei, G. (2014). Relationship between capital structure and performance of non-financial companies listed in the Nairobi Securities Exchange, Kenya. Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics, 1(2), 72-90.
Myers, S. C. (1984). The capital structure puzzle. The journal of finance, 39(3), 574-592.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
Oyerinde, A. S. (2017). Bank Performance versus Recession Indicators: A Linear Cointegration Approach. Indian Journal of Finance and Banking, 1(1), 8-15.
Rahman, M. A., Sarker, M. S. I., & Uddin, M. J. (2019). The Impact of Capital Structure on the Profitability of Publicly Traded Manufacturing Firms in Bangladesh. Applied Economics and Finance, 6(2), 1-5.
Roman, A., & Danuletiu, A. E. (2013). An empirical analysis of the determinants of bank profitability in Romania. Annales Universitatis Apulensis: Series Oeconomica, 15(2), 580.
Rouf, D. (2015). Capital structure and firm performance of listed non-financial companies in Bangladesh. The International Journal of Applied Economics and Finance, 9(1), 25-32.
Salike, N., & Ao, B. (2018). Determinants of bank profitability: role of poor asset quality in Asia. China Finance Review International, 8(2), 216-231.
Shubita, M. F., & Alsawalhah, J. M. (2012). The relationship between capital structure and profitability. International Journal of Business and Social Science, 3(16), 104-112.
Sufian, F. (2012). Determinants of bank profitability in developing economies: empirical evidence from the South Asian banking sectors. Contemporary South Asia, 20(3), 375-399.
Sufian, F., & Habibullah, M. S. (2009). Determinants of bank profitability in a developing economy: Empirical evidence from Bangladesh. Journal of business economics and management, 10(3), 207-217.
Thomas, K., Ababio, K. A., & Zakari, A. (2012). Empirical Analysis of the Association between Capital Structure and Performance of Rural Banks in Ghana. Journal of Money, Investment and Banking, 124-130.
Ünvan, Y. A., & Yakubu, I. N. (2020). Do bank-specific factors drive bank deposits in Ghana?. Journal of Computational and Applied Mathematics, 376, 112827.
Yakubu, I. N. (2016). Bank-Specific and Macroeconomic Determinants of Commercial Banks Profitability in Ghana. International Finance and Banking, 3(2), 89-99.
Yakubu, I. N. (2019). Does corruption grease or sand the wheels of bank profitability in ghana?. Cogent Economics & Finance, 7(1), 1701909.
Yakubu, I. N., Alhassan, M. M., Mikhail, A. A., & Alhassan, A. N. I. (2017). Commercial Banks Performance in Ghana: Does Capital Structure Matter?, International Journal of Accounting and Financial Reporting, 7(1), 333-342.
Yapa Abeywardhana, D. (2015). Capital structure and profitability: An empirical analysis of SMEs in the UK. Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB), 4(2), 1661-1675.
Akani, H. W., & Ifechi, K. N. J. (2017). Effects of capital structure and board structure on corporate performance of selected firms in Nigeria. Indian Journal of Finance and Banking, 1(2), 1-16.
Akber, S. M. (2019). Influential Factors Responsible for Profitability: A Technical Study on Commercial Banks in Bangladesh. International Journal of Accounting & Finance Review, 4(2), 22-28.
Akomeah, E., Bentil, P., & Musah, A. (2018). The Impact of Capital Structure Decisions on Firm Performance: The Case of Listed Non-Financial Institutions in Ghana. International Journal of Academic Research in Accounting, Finance and Management Sciences, 8(4), 1-15.
Anafo, S. A., Amponteng, E., & Yin, L. (2015). The impact of capital structure on profitability of banks listed on the Ghana Stock Exchange. Research Journal of Finance and accounting, 6(16), 26-34.
Anthony, H. (2013). Capital Structure and Profitability of Selected Listed Non-financial Firms in Ghana. International Journal of Business and Social Sciences, (2), 1-30.
Awunyo-Vitor, D., & Badu, J. (2012). Capital Structure and Performance of Listed Banks in Ghana. Global Journal of Human Social Sciences, 12(5), 57-62.
Azhagaiah, R., & Gavoury, C. (2011). The Impact of Capital Structure on Profitability with Special Reference to IT Industry in India. Managing Global Transitions: International Research Journal, 9(4), 371-392.
Batten, J., & Vo, X. V. (2019). Determinants of bank profitability—Evidence from Vietnam. Emerging Markets Finance and Trade, 55(6), 1417-1428.
Bezawada, B. (2020). Corporate Governance Practices and Bank Performance: Evidence from Indian Banks. Indian Journal of Finance and Banking, 4(1), 33-41.
Birru, M. W. (2016). The impact of capital structure on financial performance of commercial banks in Ethiopia. Global Journal of Management and Business Research. 16(8), 44-52.
Bobakova, V. (2003). Possibilities of the increasing of the profitability of a commercial bank. Biatec, 11(4), 26-29.
Chechet, I. L., & Olayiwola, A. B. (2014). Capital structure and profitability of Nigerian quoted firms: The agency cost theory perspective. American International Journal of Social Science, 3(1), 139-158.
Davydenko, A. (2010). Determinants of bank profitability in Ukraine. Undergraduate Economic Review, 7(1), 2.
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307-327.
Dietrich, A., & Wanzenried, G. (2014). The determinants of commercial banking profitability in low-, middle-, and high-income countries. The Quarterly Review of Economics and Finance, 54(3), 337-354.
Echekoba, F. N., Egbunike, C. F., & Ezu, G. K. (2014). Determinants of bank profitability in Nigeria: Using Camel Rating Model (2001–2010). IOSR Journal of Business and Management, 16(9), 44-50.
Gatsi, J. G., & Akoto, R. K. (2010). Capital structure and profitability in Ghanaian banks. Available at SSRN 1618952.
Goyal, A. M. (2013). Impact of capital structure on performance of listed public sector banks in India. International journal of business and management invention, 2(10), 35-43.
Habib, H., Khan, F., & Wazir, M. (2016). Impact of debt on profitability of firms: Evidence from non-financial sector of Pakistan. City University Research Journal, 6(1), 70-80.
Hasan, M. S. A., Manurung, A. H., & Usman, B. (2020). Determinants of Bank Profitability with Size as Moderating Variable. Journal of Applied Finance and Banking, 10(3), 153-166.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the econometric society, 46(6), 1251-1271.
Hoque, M. A., Ahmad, A., Chowdhury, M. M., & Shahidullah, M. (2020). Impact of Monetary Policy on Bank’s Profitability: A Study on Listed Commercial Banks in Bangladesh. International Journal of Accounting & Finance Review, 5(2), 72-79.
Islam, M. A., & Rana, R. H. (2017). Determinants of bank profitability for the selected private commercial banks in Bangladesh: A panel data analysis. Banks & bank systems, 12(3),179-192.
Kartikasari, D., & Merianti, M. (2016). The effect of leverage and firm size to profitability of public manufacturing companies in Indonesia. International Journal of Economics and Financial Issues, 6(2), 409-413.
Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: empirical evidence from European banking sector. Journal of financial reporting and Accounting, 14(1), 86-115.
Messai, A. S., Gallali, M. I., & Jouini, F. (2015). Determinants of bank profitability in Western European Countries evidence from system GMM estimates. International business research, 8(7), 30-42.
Minnema, J., & Andersson, A. (2018). The relationship between leverage and profitability: A quantitative study of consulting firms in Sweden, Dissertation, Umeå University, Sweden.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of finance. American Economic Review, 48(3), 291-297.
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American economic review, 433-443.
Musah, M., & Kong, Y. (2019). The association between capital structure and the financial performance of non-financial firms listed on the Ghana Stock Exchange (GSE). International Journal of Research in Social Sciences, 9(5), 92-123.
Mwangi, L. W., Makau, M. S., & Kosimbei, G. (2014). Relationship between capital structure and performance of non-financial companies listed in the Nairobi Securities Exchange, Kenya. Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics, 1(2), 72-90.
Myers, S. C. (1984). The capital structure puzzle. The journal of finance, 39(3), 574-592.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
Oyerinde, A. S. (2017). Bank Performance versus Recession Indicators: A Linear Cointegration Approach. Indian Journal of Finance and Banking, 1(1), 8-15.
Rahman, M. A., Sarker, M. S. I., & Uddin, M. J. (2019). The Impact of Capital Structure on the Profitability of Publicly Traded Manufacturing Firms in Bangladesh. Applied Economics and Finance, 6(2), 1-5.
Roman, A., & Danuletiu, A. E. (2013). An empirical analysis of the determinants of bank profitability in Romania. Annales Universitatis Apulensis: Series Oeconomica, 15(2), 580.
Rouf, D. (2015). Capital structure and firm performance of listed non-financial companies in Bangladesh. The International Journal of Applied Economics and Finance, 9(1), 25-32.
Salike, N., & Ao, B. (2018). Determinants of bank profitability: role of poor asset quality in Asia. China Finance Review International, 8(2), 216-231.
Shubita, M. F., & Alsawalhah, J. M. (2012). The relationship between capital structure and profitability. International Journal of Business and Social Science, 3(16), 104-112.
Sufian, F. (2012). Determinants of bank profitability in developing economies: empirical evidence from the South Asian banking sectors. Contemporary South Asia, 20(3), 375-399.
Sufian, F., & Habibullah, M. S. (2009). Determinants of bank profitability in a developing economy: Empirical evidence from Bangladesh. Journal of business economics and management, 10(3), 207-217.
Thomas, K., Ababio, K. A., & Zakari, A. (2012). Empirical Analysis of the Association between Capital Structure and Performance of Rural Banks in Ghana. Journal of Money, Investment and Banking, 124-130.
Ünvan, Y. A., & Yakubu, I. N. (2020). Do bank-specific factors drive bank deposits in Ghana?. Journal of Computational and Applied Mathematics, 376, 112827.
Yakubu, I. N. (2016). Bank-Specific and Macroeconomic Determinants of Commercial Banks Profitability in Ghana. International Finance and Banking, 3(2), 89-99.
Yakubu, I. N. (2019). Does corruption grease or sand the wheels of bank profitability in ghana?. Cogent Economics & Finance, 7(1), 1701909.
Yakubu, I. N., Alhassan, M. M., Mikhail, A. A., & Alhassan, A. N. I. (2017). Commercial Banks Performance in Ghana: Does Capital Structure Matter?, International Journal of Accounting and Financial Reporting, 7(1), 333-342.
Yapa Abeywardhana, D. (2015). Capital structure and profitability: An empirical analysis of SMEs in the UK. Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB), 4(2), 1661-1675.
Published
2021-07-20
How to Cite
Bunyaminu, A., Yakubu, I. N., & Bashiru, S. (2021). THE EFFECT OF FINANCIAL LEVERAGE ON PROFITABILITY: AN EMPIRICAL ANALYSIS OF RECAPITALIZED BANKS IN GHANA. International Journal of Accounting & Finance Review, 7(1), 93-102. https://doi.org/10.46281/ijafr.v7i1.1227
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2021 Alhassan Bunyaminu, Ibrahim Nandom Yakubu, Shani Bashiru
This work is licensed under a Creative Commons Attribution 4.0 International License.
