We examine how listed corporations in Ghana finance their growth and to what extent do they rely on external finance relative to internal finance. As companies expand through the acquisition of assets they have choices to make in how that growth is financed. Past earnings can be retained as a source of internal finance or be paid to shareholders as dividends. External sources of finance include both the issuance of new equity (external equity) and various debts instruments (external debt).
Using the growth in the balance sheet over the period 1995 to 2002 as the sample period, the financing of the growth in total assets is divided into these three categories expressed as a percentage of change in total assets for the period. The means of these three ratios should sum to 100 percent.
The result shows that the stock market is the most important source of long term external finance.
Between 1995 and 2002 the average quoted Ghanaian firm finances 11.45 percent of growth of total assets from internal sources. External debt, however, finances 47.86 percent of growth of total assets and new issues of equity finances 40.69 percent of growth in total assets.5 Our examination of the debt maturity (short term debt relative to total debt) shows that about 84 percent of total debt is short term.
This result may be subject to measurement biases resulting from high inflation and the use of an indirect method of measuring the equity finance variable (Singh, 1995). One potential effect of the residual estimation of the equity financing variable is that it is likely to have an upward bias due to the fact that revaluations and reserves may get included in the equity variable (Singh, 1995). We investigate whether, in the case of Ghana, the indirect method introduced any significant bias. We computed the contribution of new equity finance as:
Following Whittington, Saporta and Singh (1997), in this alternative method, the equity finance variable is measured independently while the internal finance variable is made the residual.
The result of the direct method shows that the contribution of equity to total assets growth for the median listed Ghanaian firm has reduced to 12.20. Internal finance is now the second most important source of finance after total liabilities. A comparison with the indirect method shows that the indirect method overstated the contribution of equity to total assets growth by 20.85 percentage points (33.05112.20).
IMF Working Paper African Department Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges Prepared by Charles Amo Yartey and Charles Komla Adjasi August 2007
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