Corporate Governance and Financing Decisions: A Study of Ghanaian Listed Firms

Abstract

Earlier studies on the Ghana stock exchange failed to consider the influence of institutional ownership and board committee on the financing decisions of the firms. This study examines the impact of institutional ownership and board committee on capital structure decisions. The study also examines the nature of corporate board and financing pattern of the firms for the period under investigation. Twenty nine (29) firms out of total number of thirty four (34), on the Ghana Stock Exchange were used for the periods 2004 to 2011 based on the availability of data. Secondary data on board and ownership structure were obtained from the annual reports of firms and the Ghana Stock Exchange facts book. Information on best governance practices were also from the annual reports and guidelines of Ghana‟s Securities and Exchange Commission. Using unbalance data with a maximum and minimum period of 8 and 3 years respectively, the fixed effect regression technique was used to examine the effect of board characteristics and ownership structure on financing decisions of the firms. A positive and significant relationship was found in the case of board size, board composition, institutional ownership and firm type. CEO duality, board committee and profitability register negative relationships with capital structure. Managerial ownership, growth and firm size recorded not significant relationships with financing decisions. The result suggests that firms on the Ghana Stock Exchange pursue high debt policy with higher proportion of outside directors, larger board size, and higher percentage of institutional shareholdings. However, lesser number of oversight committees and one tier leadership style are associated with lower debt levels. This study therefore reaffirms that corporate governance influences financing decisions of Ghanaian listed firms. The findings of the study also shows that, the board structure of firms on the Ghana Stock Exchange is dominated by non executive directors, larger board size, two tier leadership structure and an average of two board committees. Again the ownership structure is dominated by institutional holdings. As indicated by this work, the capital structure of Ghanaian listed firms is likely to follow the pecking order theory. To access debt financing, the study recommends firms to open up for institutional investors, increase the board size, with greater percentage of it being outside directors. However increase in board size beyond a certain point would reduce debt. Also, the number of oversight board committees must be maintained at a desired minimum. Generally, it was observed that listed firms complied with rules and directives of the regulatory authorities and therefore to ensure best practices in corporate governance in the country as a whole, more firms have to be encouraged to list on the stock exchange so that regulation can compel them to exhibit the best of conducts.