Assessing the Determinants of Business Failure of Companies Listed on the Ghana Stock Exchange

Abstract

This study aims at assessing the determinants of business failure of companies listed on Ghana Stock Exchange using financial ratios as indicators of failure. Using 15 corporate determinants, a collective sample of 25 companies were split into 30% hold out sample, 70% estimation sample and the overall prediction for a cumulative five-year data set. To obtain the significant ratios that bring about business failure, factor Analysis and logit model were respectively employed to reduce the number of correlated variables into smaller uncorrelated variables and to predict the accuracy of the ratios that are significant indicators of failure. From the analysis, the corporate determinants that are consistent indicator of financial distress are profitability ratio, specifically the Return on total asset and Leverage ratio. The study therefore recommends that the regulatory authorities such as the Ghana Stock Exchange and the Securities and Exchange Commission should monitor and assess the financial health of listed firms based on the two significant financial variables (profitability ratio and Leverage ratio).