Factors Affecting Financial Leverage of Manufacturing Firms Listed on the Ghana Stock Exchange

Abstract

In this study, I aimed at three objectives. First, to determine the financial leverage of manufacturing firms listed on the Ghana Stock Exchange. Second, t o analyse the relationship between financial leverage and profitability. Third, t o examine the factors affecting financial leverage of manufacturing firms that are listed on the Ghana Stock Exchange. Employing descriptive and trend analysis, my results sh owed that financial leverage of manufacturing firms listed on the Ghana Stock Exchange has been varying over time precisely, financial leverage increased fr om 2006 t o 2007, declined thereafter until 2013 where a sharp increase was observed t o 2015 and then decreased again fr om 2016 t o 2018.This suggests that manufacturing firms rely m ore heavily on debt financing thus m ore exposed t o the risk of financial leverage, bankruptcy, whiles financing their operations.In terms of my second objective, using the dynamic system Generalized Method of Moments (GMM) t o analyze the relationship between financial leverage and manufacturing firms’ pr ofitability, I established that debt t o t otal asset c omp onent of financial leverage is negatively linked t o profitability whiles debt t o equity and equity t o total asset options of financial leverage were positively linked t o profitability of manufacturing firms. Lastly, the study employed panel regression, t o examine the key determinants of financial leverage. Fr om this regression, I find that return on equity, production cost, inventory, firm size and tangibility are key determinants of financial leverage of the manufacturing firms in Ghana.