Capital Structure of Companies in Ghana : Relationship between Capital Structure Measures and Performance

One of the main factors subject to intense debate in capital structure studies is whether to use the market value or the book value of debt and equity as the correct measure of leverage (Salehi, 2009). Various arguments have been raised in favour of which of the measures to be used in capital structure analysis. However, much has not been done to determine which of the measures has a more significant relationship with financial performance. The purpose of this paper was to demonstrate and recognize the link between capital structure measures and financial performance and to determine which of the capital structure measures has a more significant relationship with performance. Many measures of firm performance were negatively correlated with financial leverage. Meaning, companies that have high profitability and good performance in Ghana have less debt in their capital structure. The study demonstrated that the market value of capital structure has a stronger link with financial performance as compared to the book value. The market value should therefore be taken more into consideration in capital structure analysis. This finding agrees with the empirical work of Salehi (2009).