The Effect of Capital Structure on Financial Performance of Insurance Companies: Empirical Evidence from Private Insurance Companies in Ethiopia
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Date
2019-02
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Addis Ababa University
Abstract
Capital structure decision related to a given business entity is at the center of many other
decisions in the area of corporate finance. The main objective of this paper was to examine the
effect of capital structure on financial performance of private insurance companies in Ethiopia.
To realize this objective, the researcher applied quantitative research approach. The study
employed a panel data and its regression analysis tools. The dataset comprised nine Ethiopian
private insurance companies that were selected through purposive sampling technique. The data
covered period of 10-years (2008-2017 G.C.). The data used in the study was secondary data
which were firm level accounting data.The study investigated the effect of capital structure on
financial performance proxied by return on Equity by using leverage ratio as variables of capital
structure and five additional explanatory variables (degree of operating leverage, reinsurance
dependence, company size, claim ratio, and premium growth) that can affect insurance
companies’ financial performance. The data was analyzed through the help of Ordinary least
square estimation method (panel least square regression analysis method). As panel data
regression analysis tool, random effect model was used to analyze the panel data. The result of
random effect regression model revealed that debt ratio,degree of operating leverage, company
size and claim ratio have statistically significant effects on financial performance/profitability of
private insurance companies of Ethiopia. Reinsurance dependence and premium growth have
insignificant negative and positive effect on financial performance of private insurance
companies of Ethiopia, respectively. Debt ratio, degree of operating leverage and company size
have significant positive effects whereas claim ratio has significant negative effect on financial
performance of private insurance companies of Ethiopia. Furthermore, all assumptions of
classical linear regression model were not violated. Thus, the residuals were found
homoscedastic, no autocorrelation, normally distributed and no multi-collinearity after two
extreme negative values have been controlled through the use of two dummy variables. Based on
the findings, the study recommends that the board and management of private insurance
companies should give high attention to these variables by considering the way they underwrite
both life and non-life insurance product by trying to minimize the influence of underwriting risk
by adopting a risk management strategy and increase their net written premium.
Description
A Thesis Submitted to the School of Graduate Studies of Addis Ababa
University in Partial Fulfillment of the Requirements for the Degree of
Masters of Science in Accounting and Finance.
Keywords
Capital Structure, Financial performance, Private insurance companies, Return on Equity