Determinants of Capital Structure of Commercial Banks in Ethiopia
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Date
2012-06
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Addis Ababa University
Abstract
Determining the optimal capital structure is one of the most fundamental policy decisions
faced by financial managers. Since optimal debt ratio influences firm’s value, different
firms determine capital structures at different levels to maximize the value of their firms.
Thus, this study examines the relationship between leverage and firm specific
(profitability, tangibility, growth, risk, size and liquidity) determinants of capital
structure decision, and the theories of capital structure that can explain the capital
structure of banks in Ethiopia. In order to investigate these issues a mixed method
research approach is utilized, by combining documentary analysis and in-depth
interviews. More specifically, the study uses twelve years (2000 - 2011) data for eight
banks in Ethiopia.
The findings show that profitability, size, tangibility and liquidity of the banks are
important determinants of capital structure of banks in Ethiopia. However, growth and
risk of banks are found to have no statistically significant impact on the capital structure
of banks in Ethiopia. In addition, the results of the analysis indicate that pecking order
theory is pertinent theory in Ethiopian banking industry, whereas there are little evidence
to support static trade-off theory and the agency cost theory. Therefore, banks should
give consideration to profitability, size, liquidity and tangibility when they determine
their optimum capital structure
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Keywords
Banking industry, Empirical study on ethiopian