Stock price volatility is a serious indicator of market risk, reflects fluctuations in a firm’s market value and has significant implications for investor confidence, firm valuation and financial decision-making. Understanding the determinants of stock price volatility is essential for firms seeking to optimize their financial strategies and mitigate risks. Among these determinants, capital structure, the proportion of debt and equity used to finance a firm’s operations has received considerable attention in corporate finance studies. Empirical evidence on the relationship between capital structure and stock price volatility remains ambiguous and inconclusive. Some studies suggest a positive relationship, arguing that higher leverage amplifies financial risk and uncertainty faced by shareholders. Others report a negative relationship, positing that higher leverage can reduce agency costs and information asymmetry between managers and shareholders. Meanwhile, some studies find no significant relationship, suggesting that other factors may dominate the effect of leverage on stock price fluctuations. This variability indicates the need for a deeper exploration of factors that may influence this relationship, particularly in contexts with unique institutional dynamics.
The theoretical foundation of this study is primarily anchored in agency theory, which emphasizes the conflicts of interest that arise from the separation of ownership and control within firms. In addition to agency theory, this study draws on the trade-off theory and pecking order theory to further contextualize the interaction between governance and financial decisions. The trade-off theory posits that firms strive to balance the tax benefits of debt financing with the costs of financial distress, such as bankruptcy risk.
This research aims to investigate the moderating influence of board composition on the relationship between capital structure and stock price volatility in Ghanaian listed firms. Utilizing data from 20 Ghanaian listed firms spanning 2011–2021, the study employs the generalized method of moments (GMM), a statistical technique for analysis.
The results indicate that both capital structure and board composition significantly influence stock price volatility in Ghanaian listed firms. Specifically, a higher debt-to-equity ratio leads to higher stock price volatility, while a better board composition reduces stock price volatility. The study further establishes a negative and significant moderating effect of board composition on the relationship between capital structure and stock price volatility, implying that firms with a well-structured board experience a more pronounced reduction in stock price volatility as they adjust their capital structure. The findings offer practical insights for regulators, shareholders, managers and creditors on enhancing corporate governance practices and optimizing capital structure decisions to mitigate financial risk and improve firm value.
This research contributes to the existing literature by presenting novel insights into how board composition influences the link between capital structure and stock price volatility from a developing country perspective, making it a pioneering effort in the Ghanaian context.
This study is published in African Journal of Economic and Management Studies under Emerald Publishing Limited. Details of the study, methods used, findings and practical implications can be found at: https://www.emerald.com/insight/content/doi/10.1108/ajems-04-2024-0264/full/html. The following people are the authors of this article: Alhassan Bunyaminu, Willis Nsoh Ayamga, Ibrahim Nandom Yakubu, Joseph Kwadwo Tuffour, Adibura Baba Seidu & Fuseini Mahama
