Title:
IMPACT OF DEBT THRESHOLD LEVEL ON FINANCIAL PERFORMANCE OF LISTED FIRMS ON GHANA STOCK EXCHANGE

Authors:
David Mensah Awadzie ,Ghana

Abstract:
This study is to investigate the relationship between debt and financial performance. The study employed the Panel Threshold Regression model introduced by Hansen (1999). The study used panel data covering a period of fifteen-years from 2005 to 2019 for twenty-five listed companies on the Ghana Stock Exchange. Financial performance was measured by return on assets. The study finds the threshold level of debt at 43.85%. The result of the study, however, indicates that the debt threshold level is positive in both low and high debt regimes but the degree of debt impact on both regimes is not comparable. It has also indicated that debt has a significant potential impact on financial performance in low debt regime and a slightly lower impact in high debt regime. The findings suggest that more debts have been contracted by the companies in low debt regime than high debt regime. The results of explanatory variables used in the study such, as inflation rates reveal an insignificant negative relationship with financial performance, and foreign exchange rate and interest rates also produce an insignificant negative relationship with financial performance. The findings of this study will help the management of the listed companies on the Ghana Stock Exchange to inform their decision on what percentage of debt should form part of the company’s capital structure because the more the value of the debt themore it would impact on the financial performance. However, it would be advisable that management of all the listed companies both local or foreign should keep their debt portfolio below the 43.85% estimated threshold level to improve the performance of the company.