Determinants of Capital Structure of the Construction Companies in Addis Ababa, Ethiopia

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Capital structure has attracted intense debate in the financial management arena for near a half-century. The basic question is whether a unique combination of debt and equity capital maximizes firm value, and if so, what factors determine a firm‘s optimal capital structure. Several studies have been conducted to examine the factors that can affect the capital structure of companies in various countries. However, few countable studies have been conducted in Ethiopia. Hence, this study examines empirically the determinants of capital structure of Construction Companies in Ethiopia, using secondary panel data and a quantitative research approach for identifying what determines both externally as well as internally their capital structure. And also to understand which capital structure theory is appealing to them. Secondary panel data collected from audited financial statements of 17 randomly selected construction companies (out of the population of 73 Companies), covering the period of 8 years (2013 to 2020). The collected data were analyzed using STATA 14 econometric software to come up with descriptive, regression, and correlation results. Diagnostics tests such as normality, correlation, autocorrelation, multicollinearity, and heteroscedasticity tests were conducted to ensure that the data suits the basic assumptions of the classical linear regression model. The findings from the panel random effect estimation appear to support the Pecking Order Theory of capital structure. This implies that the construction companies in Ethiopia are not in a position to trade off the benefits of debt financing and its cost, and in turn, they may not maintain the optimum debt ratio (leverage ratio), which can increase the value of the firm. Specifically, the result revealed that the variables including Earning Volatility, Growth Opportunity, Firm’s Size, and Age of Firms positively affect the variations on the capital structure of construction companies. Profitability, liquidity, Tangibility, and Interest rate, on the other hand, inversely affect their capital structure. Furthermore, among the whole independent variables, which were tested in this study, Profitability, Liquidity, Tangibility, Firm’s Size, and Age of the companies were found as significant variables of the capital structure of construction companies in Ethiopia. It is, therefore, recommended that in carrying out their debt financing decision, the financial managers of Construction Companies, should ascertain and properly measure those significant variables to have an optimum financing mix for their firms. Keywords: Determinants of Capital structure, Pecking Order theory, Trade-off Theory, Ethiopian Construction Companies, panel Data.



Determinants of Capital structure, Ethiopian Construction Companies