Degree of Leverage and Risk Adjusted Performance of Listed Financial Institutions in Ghana

The Basel Accord III stipulates that the performance of banks should be adjusted for risk for a fair measurement. The current study investigated how the risk-adjusted return on equity of listed financial institutions in Ghana is influenced by the degree of leverage and used liquidity and size as control variables. The causal research design was used to explain the cause-and-effect relationships between the degree of operating and financial leverage and profitability variables. The target population for this study was made up of 12 financial institutions, as recorded in the Ghana Stock Exchange fact book (2012), comprising ten banking and two insurance companies. The panel data methodology was used to analyse the outcome of the study. The analysis revealed that liquidity and degree of leverage have an inverse relationship with the risk adjusted return on equity of the listed financial institutions, while operating leverage is positively related to risk adjusted return on equity of the listed financial institutions.