The Determinants of Financial Pattern: Evidence from Construction Companies in Addis Ababa; Ethiopia
No Thumbnail Available
Date
2011-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
Capital structure has attracted intense debate in the financial management arena for nearly half-
century. The basic question of whether a unique combination of debt and equity capital
maximizes firm value, and if so, what factors determine a firm‘s optimal capital structure have
been the subject of frequent debate in the capital structure literature. This paper examines
empirically the problem of Construction Companies, capital structure decisions using firm-level
panel data with the aim of identifying what determines both externally as well as internally the
capital structure of Ethiopian construction industry? And to understand which of the capital
structure theories are appealing to them? To do this, the study examines the impact of eight firm
specific variables and two macroeconomic variables on the leverage of the sampled construction
firms. A sample of 30 companies were taken from the population of 266 companies by using
simple random sampling and secondary data (Panel data i.e. which embodies information across
both time and space.) was collected through structured record review from audited financial
statements of selected companies for the period of six years (2001-2006EC). And the collected
data would be analyzed on quantitative basis through multiple regressions by using Eviews6
software packages. The panel random effect estimation result revealed that, debt ratio (leverage)
have: a positive relation, with asset tangibility, growth opportunity, and size of the firm. But,
have a negative relation, with profitability, liquidity and risk (earning volatility). However, age
of a firm, non-debt tax-shield, inflation and GDP have no statistically significant impact on a
firm‘s choice of debt ratio. The results mostly appear to support the pecking order theory of
capital structure. From the view point of the determinants of capital structure, the findings of
this study would assist in establishing financial policy guidelines that will mitigate financial risk
in the various firms. Therefore, it is recommended that in carrying out their debt financing
decision, the financial managers of Construction Companies, should ascertain and properly
measure those significant variables in order to have an optimum financing mix for their firms.
Keywords: Capital Structure, Determinants of Capital Structure, Construction Company,
pecking order theory, trade of theory, MM theory, and agency cost theory
Description
Keywords
Capital structure, Determinants of capital structure, Construction company, pecking order theory, Trade of theory, MM theory, Agency cost theory