Factors Affecting Capital Structure Decision: Evidence from Ethiopian Insurance Firms
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Date
2014-06
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Addis Ababa University
Abstract
Capital structure decision is one of the core decisions that financial managers should care for.
Different firms will have different choice of funds that are categorized under either debt or
equity. But the most important question is what factors to affect their choice of finance and how
they affect it. In order to give answer for such question, this study aims to assess the impact of
firm specific and macroeconomic factors on capital structure decision in the environment of
Ethiopian insurance sector by using seven years data (2007-2013). In order to achieve this aim
the researcher regressed profitability, liquidity, business risk, size, growth opportunity, age,
GDP growth rate, interest rate, and inflation rate against the dependent variable as measured by
total debt ratio. Such regression was made based on random effects model with the help of
EVIEWS 6 software. The results of this study suggest that business risk, firm size, age, and
inflation rate variables were significant factors affecting leverage of insurance firms in Ethiopia
positively; confirming tradeoff and pecking order theories as prominent theories for the sector.
On the other hand, profitability, liquidity, growth opportunity, GDP growth rate, and interest
rate variables found as insignificant to affect the dependent variable. Thus, Ethiopian insurance
firms and their managers are advised to have closer attention on business risk, size, age, and
inflation rate factors in order to make optimal decision pertaining to capital structure. Besides,
they also advised to give attention first for tradeoff then for pecking order theories of capital
structure respectively as per their weight of importance
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Keywords
Capital structure, Evidence from ethiopian insurance