Capital Structure Determinants among Manufacturing Enterprises: The Case of Developing Financial Markets in Ghana and The Gambia
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Date
1995-02
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Ohio State University. Department of Agricultural, Environmental, and Development Economics
Abstract
The focus of this study is the capital structure of non-farm manufacturing enterprises in low income countries. The study examined the importance of different sources of financing, internal and external, in the capital structure of the firm and the factors explaining entrepreneurial behavior in using different financial contracts. The capital structure was modeled by considering a one-period world within a deterministic approach. A set of testable hypotheses derived from this model was applied to a sample of 325 micro, small and medium scale manufacturing enterprises in Ghana and The Gambia. The findings of this study support the hypotheses that the characteristics of the enterprise, attributes of the entrepreneur, rates of return, interest rates, transaction costs of alternative sources of financing and the respective shares of these securities simultaneously determine the capital structure of the enterprise. Implications of this research suggest that improving formal finance, which is the emphasis of most policies, would be of benefit to all creditworthy firms. But the small size and limited collateral capacity of many firms in the sample suggest that only a few firms will obtain this source of finance. Therefore, informal finance is likely to continue to be important. Trade finance is among the most significant sources of finance in the manufacturing sector. Traders sell inputs to small enterprises on credit and customers sub-contract small enterprises to deliver custom-made products. If formal intervention schemes are necessary, then providing support through economic subs-sectors may be a most efficient method to reach small enterprises.