CHAPTER ONE INTRODUCTION

This section discusses the study’s background, the research problem, the purpose and objectives of the work, the research questions, methodology and the significance of the study. In addition, it presents the scope and chapter organization of this research.

Background of the Study

The importance of a company’s financing structure and how a firm is financed has been the subject of intense debate between two schools of thought: the traditionalist view and the modernist view. The traditionalist view postulates that companies have an optimal capital structure and they can benefit from the tax advantages associated with debt finance by including some good stock of debt- finance in their capital structure. Miller & Modigliani (1958) as key pioneers of the modernist view, argue that the capital structure and financing decisions are exclusive of each other (Watson and Head, 2004). The key issue regarding capital structure is how to manage the cost and benefit of each source of finance and how to arrive at a choice that reduces the cost and increases value to the business. In making this decision, internal and external factors that impact capital structure has to be taken into consideration to ensure maximum benefit to the firm. Factors within the firm such as profitability and asset tangibility are within management control whilst external factors such as monetary policy, GDP and inflation are beyond their control. Given that questions relating to the relationship between corporate finance and monetary policy have received great prominence (Prasad and Ghosh, 2005), this paper focuses on how monetary policy impacts the capital structure and financial performance of companies in Ghana.

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