The Effect of Capital Structure on the Financial Performance of Insurance Companies in Ghana

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This study purposefully looked at the effect of capital structure on financial performance of insurance firms in Ghana. The main objectives which directed the study focused on two areas which are the trend of equity and debt of insurance firms in Ghana between 2015-2019 and the effect of capital structure (equity, debt, long-term debt, and short-term debt) on performance (ROA and ROE). The study used the quantitative approach with the explanatory design. Annual data on 10 insurance firms were selected using the convenience approach. Data obtained were analysed by means of trend and inferential analysis using the multiple regression analysis. The study found that when the trend of equity finance move upward, debt finance move the opposite direction and vice versa. The study found that equity financing has a negative relationship with ROA but has a positive relationship with ROE. The study found that debt financing has positive effect on both ROA and ROE of insurance firms but the extent of effect on ROA is greater than that of ROE. Again, the study found that long-term debt has positive effect on ROA but the otherwise is the case for ROE. Lastly the study revealed that short-term debt has negative relationship with both ROA and ROE on insurance firms in Ghana. A conclusion is therefore made that insurance firms in Ghana exercise caution in the use of debt, especially short-term debt since it exerts negative effect on profitability of the firms, but rather improve on financing most of their operational activities using retained earnings instead which is congruent with the contention of the pecking order theory.
A thesis submitted to the department of accounting and finance college of humanities and social science in partial fulfillment for the award of master of science in accounting and finance