Equity Risk Exposure and Proprietary Value: Evidence from Banks in Ghana

Abstract

The paper investigated the relationship between equity risk exposure and proprietary value of banks in Ghana. The study first explored and conceptualised equity risk exposure of capital structure decision and subsequently investigated the causal relationship between equity risk exposure and proprietary value. This paper was conceived from the unexplored risk associated with capital structure decision especially from the perspective of the equity participants of the banking sector. Annual data was used with the eleven years span from 2004-2014. This paper employed panel ordinary least square approach to conduct the estimation of the relationship between equity risk exposure and proprietary value. It was found that short term equity risk exposure has significant negative effect on the proprietary value of banks in Ghana. Contrary, the long term equity risk exposure and total equity risk exposure indicated significant positive influence on the same proprietary value. It was concluded that equity risk exposure is indeed an integral part of capital structure decision with significant implication. It was also concluded that the consequence of equity risk exposure depends on the type of debt financing used which may be based on time horizon. It negative exposure implies that though banks in Ghana earn high interest income from short term debt (high interest spread), it increases the risk that equity participants could lose their investment providing evidence to support the UT Bank and Capital Bank scandal in Ghana. It is recommended that banks in Ghana should apply short term debt to low risk investment to mitigate equity risk exposure whiles using long term debt for long term investment

Keywords: Capital structure, short term equity risk exposure, long term equity risk exposure, total equity risk exposure and proprietary value