Effects of Capital Structure on the Performance of Ethiopian Commercial Banks in Ethiopia
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Date
2021-01
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A.A.U
Abstract
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.
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Keywords
Commercial Banks, Capital structure, financial performance, and panel data