The Effect of Capital Structure on Financial Performance of Construction Companies in Addis Ababa, Ethiopia
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Date
2018-06
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Addis Ababa University
Abstract
The topic of capital structure has been widely explored as an area of study. Many studies have tried to identify the optimum capital structure that would allow profit maximization for companies. However, with capital structure, there have been many divergent findings due to different sectors exhibiting different behaviors and model that attempt to establish relationship between capital structure and performance. This research therefore, seeks to examine the effect of capital structure on financial performance of 16 grade one general contractors in Addis Ababa in the year 2012 -2017. The objective of this study is to determine the effect of capital structure on financial performance. The researcher used secondary data from audited financial statements of grade one general contractors. Quantitative methodology using random sampling was employed and the data collected were analyzed using E-views 8 econometric software to come up with descriptive, regression and correlation results. Diagnostics tests such as normality test, correlation, autocorrelation, multi co linearity and hetero scedasticity test were conducted to ensure that the data suits the basic assumptions of classical linear regression model.The regression result show that Short term debt to asset had statistically significant and positive relationship with financial performance (measured by ROA) at 5 % significance level, whereas long term debt to asset had statistically significant positive effect on financial performance of construction companies. Besides, Interest coverage ratio, tangibility and asset size also had statistically significant and positive relationship with financial performance. The findings also showed a negative significant relationship between debts to equity with financial performance. Thus, the study concluded that data from GC1 companies result mostly appear to support Trade-off theories of capital structure. The findings revealed that capital structure has statistically significant effect on financial performance of construction companies. Finally, the study recommended that construction companies in Ethiopia should employ an appropriate mix of capital structure and attention should be given for significant variables in order to increase the financial performance.
Description
A Thesis submitted to Department of Accounting and Finance in partial fulfillment of the requirements for the Degree of Master of Science in Accounting
Keywords
Capital structure, Financial performance, Grade one contractors