Impact of Monetary Policy on Capital Structure and Financial Performance of Firms in Ghana

Abstract

This research examines the impact of monetary policy on capital structure and financial performance of companies in Ghana. The research uses panel data from 2008-2017 for 33 firms on the Ghana Stock Exchange. A system GMM-technique is used to analyze the data. This technique allowed the researcher to control for autocorrelation to ensure a robust result is achieved. The study finds that firms prefer to borrow long-term when monetary policy is contracting (increasing policy rate). Also, firms decrease their short-term debts when the base rate is increasing. The study finds that firm’s performance decreases as base rate increases. Policy rate has an insignificant relationship with the companies’ ability to make earnings on its assets and netprofit levels. This research recommends that, when managers are making choices about debt/equity mix for funding their businesses, changes in monetary policy should be considered since it is better to borrow long-term debt when monetary policy is increasing. Firms should also seek to use their relationship with banks to ensure a stable interest rate in order to maintain their performance by negating the effect of base rate on their financial performance. Policy makers can also consider establishing a bond market in the country to facilitate access to long-term debt by firms. This will offer a variety of alternative to bank-loans when businesses want to increase long-term investment during increasing policy rate. Keywords: Monetary policy, Capital structure, Financial Performance, Stock Exchange