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Effect of financial leverage on the financial performance of selected listed banks on the Ghana stock exchange
The article examines the impact of financial leverage on the financial performance of selected joint-stock banks listed on the Ghana Stock Exchange. The current state of Ghana’s banking sector is analyzed, revealing a contradictory situation regarding the impact of financial leverage on potential profitability levels, as its actual effect on profitability remains insignificant. It is concluded that this situation indicates the need for more effective financial management strategies. It is substantiated that, despite the theoretical advantages of using financial leverage for profit growth, no significant correlation was found in Ghanaian banks. This leads to the conclusion that a strategy of increasing profitability based on a reliance on borrowed capital is unreliable. The study demonstrated that bank size does not have a significant impact on return on equity, refuting the assumption regarding the significance of economies of scale in enhancing financial efficiency.
A significant result was provided by the Hausman test, which indicated a close relationship between financial leverage and return on assets (ROA). Furthermore, random effects models confirmed a strong correlation between the level of financial leverage (Finley) and ROA. The results suggest that the growth of ROA in these banks is positively correlated with effective financial leverage management practices.
It is substantiated that to increase share value and attract investment, bank management should ensure that debt levels generate sufficient return on capital through a thorough assessment of the debt-to-potential-income ratio. To this end, managers must focus on ensuring the efficient allocation of resources to generate stable profits while simultaneously controlling the debt burden. It is emphasized that regular monitoring of changing market conditions and their impact on profitability and leverage strategies is critical for achieving long-term success, minimizing risks, and maximizing benefits.
Keywords: financial leverage, financial performance, banks, stock exchange, Ghana, return on assets, debt levels.
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