Financing Corporate Growth in Ghana: The Role of the Stock Market

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References: Stock Market Development in Sub-Saharan Africa - By International Monetary Fund

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 (33.05-
12.20).

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

IV. THE STOCK MARKET AND THE FINANCING OF CORPORATE GROWTH IN AFRICA

Introduction: Stock Market Development in Sub-Saharan Africa

VII G. Strengthen Education: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

VIII. SUMMARY AND CONCLUSION: Stock Market Development in Sub-Saharan Africa

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V. STOCK MARKETS AND ECONOMIC GROWTH: THE MACRO CHANNEL

VI. A. Macroeconomic Stability: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?

III. STOCK MARKET DEVELOPMENT IN SUB SAHARAN AFRICA:TRENDS AND CHARACTERISTICS

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II. STOCK MARKET AND ECONOMIC GROWTH: THEORETICAL AND ANALYTICAL ISSUES

References: Stock Market Development in Sub-Saharan Africa

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The IMF is an international organization of 185 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. Since the IMF was established its purposes have remained unchanged but its operations—which involve surveillance, financial assistance, and technical assistance—have developed to meet the changing needs of its member countries in an evolving world economy.
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