Determinants of Capital Structure in Commercial Banks of Ethiopia
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Date
2021-04
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A.A.U
Abstract
Although there have been many prior studies on the determinants of capital structure, the
question of what determines the best financing mix that maximizes a firm’s value is still the most
debatable issue in corporate finance. Besides, a great deal of previous studies focused mainly on
developed countries’ non-financial firms paying little attention to developing countries and
financial sector. Therefore, this study attempted to fill the gap by analyzing the capital structure
for commercial banks in Ethiopia. As a result, this study has examined the relationship between
leverage and firm specific (profitability, liquidity tangibility, risk, size and growth) determinants
of capital structure decision, and the capital structure theory that can explicate the capital
structure of banks in Ethiopia. Quantitative research approach was utilized for data analysis by
collecting secondary data in the form of document review. The study has used purposive
sampling technique to select among eighteen banks currently operating in Ethiopia. More
specifically, the study has used nine years (2011 - 2019) data for nine banks in Ethiopia. The
panel data were analyzed with a clustered robust random effect regression model. The findings
show that, size, tangibility, profitability and growth of the banks are important determinants of
capital structure of banks in Ethiopia. But, risk and liquidity of banks are found to have no
statistically significant impact on the capital structure of banks in Ethiopia. The empirical
findings of the study mean that the two capital structure theories, static trade-off and pecking
order, are explaining the capital structure decision of Ethiopian commercial banks. Commercial
banks in Ethiopia should pay due attention to the microeconomic variables without overlooking
the macroeconomic condition while articulating their optimal capital mix which can reduce the
weighted average cost of capital and enhance the wealth of the company. Therefore, banks
should give attention to profitability, tangibility, size and growth when they determine their
optimum capital structure.
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Keywords
Capital structure, Determinant, Ethiopia