Effects of Capital Structure on the Performance of Ethiopian Commercial Banks in Ethiopia

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Among the foremost important and crucial decisions for any business is about capital structure since it has significant influence on financial performance of a company. The objective of this paper was to analyze the effects of capital structure on the financial performance of selected Ethiopian Commercial banks. To achieve the research objectives, the researcher would use a panel data analysis, and has adopted a purposive/judgmental sampling approach. During this study, the researcher would use only secondary data and document review for collecting data from annual reports of five (5) selected Commercial banks over the past ten (10) years period from 2010 to 2019. Besides that, the data was analyzed by using a multiple regression model on a quantitative approach. The study has used return on assets (ROA) which is one of an accounting-based measure of financial performance as a dependent variable, and other five capital structure measures, these are; total debt ratio (TDR)), loan to deposit ratio (LDPR), and deposit to asset ratio (DPA) are as independent variables, and bank’s size, and growth as control variables were used. Random effect estimation model was applied for the panel data analysis through EViews 10(64x) statistical package. The result indicates that capital structure as measured by total debt to total asset indicates that it had a positive relationship with profitability measured by ROA and statistically significant at 5% level. Theoretically it was supported by tradeoff theory. Besides, loan to deposit ratio had positive relationship with profitability (ROA) and statistically not significant at even 10% significant level. It was also supported by trade-off theory. To the contrary, deposit to asset had negative relationship with profitability of banks with strongly statistically significant at 1% level measured by ROA. Theoretically it was supported by pecking order theory. On the control variables, growth and asset size had a negative relationship with profitability, and statistically significant. The result shows that the Ethiopian Commercial banks have confidence on total debt financing which maximizes banks profitability, and such banks instead of other sources should keep their financing focus to deposits. The result of growth and size in this study call for Commercial banks and higher-level managers to give attention and be efficient to maximize profitability of bank because the cause is related to efficiency of both the management and managers.



Commercial Banks, Capital structure, financial performance, and panel data