Evaluating the Dynamics of Capital Structure, Corporate Governance, and Bank Performance: A Case Study of Listed Banks in Ghana

Abstract

This study explores the interconnections among capital structure, corporate governance, and bank performance in listed banking institutions in Ghana, utilizing a comprehensive scorecard approach to assess corporate governance compliance. We identify a bi-causal link between corporate governance and stock returns, indicating that changes in corporate governance practices lead to subsequent fluctuations in stock returns. As stock returns rise, banks can attract more investors, reducing their debt and leverage (debt to equity ratio) ratios. Regarding capital structure and bank performance, we find no evidence supporting the notion that the equity ratio causes changes in stock returns, but a causal relationship exists in the opposite direction. Stock returns impact the proportion of total assets attributed to equity, as higher returns attract investors, facilitating bank expansion through new share issuance. Furthermore, we detect a bi-directional causality between stock returns and the debt ratio. Lastly, we observe a unidirectional causality where the debt to equity ratio does not cause changes in stock returns, but stock returns influence the debt to equity ratio. Rising stock returns enhance equity value, prompting banks to increase equity at the expense of debt, thus boosting operational funding through retained earnings. These findings illuminate the complex relationships between capital structure, corporate governance, and bank performance, offering valuable insights for financial practitioners and policymakers.