Determinants of capital structure of commercial banks in Ethiopia
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Date
2017-05
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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 have different choice of funds that are categorized under either debt or equity. But
the most important question is what factors determine their choice of finance and how they affect
it. In order to give answer for such question, this study examined the effect of firm specific &
macroeconomic factors of capital structure on the dependent variable as measured by total debt
ratio. It also investigates the theories of capital structure that can best explain the capital structure
of private commercial banks in Ethiopia. In order to achieve this objective the researcher fully
relied on secondary sources of data such as financial reports of private banks and reports of
National Bank of Ethiopia and regressed firm specific factors (profitability, tangibility and age)
and macroeconomic factors (GDP growth rate and interest rate) against the dependent variable
leverage. The researcher utilized quantitative approach and regressed thirteen years (2004 – 2016)
data for six private commercial banks in Ethiopia. The results of this study suggested that
profitability, GDP growth rate and interest rate variables were found to be significant factors
affecting leverage of commercial banks in Ethiopia confirming tradeoff and pecking order theories
as prominent theories for the sector. On the other hand, tangibility and age variables were found as
insignificant to affect the dependent variable. Thus, Ethiopian commercial banks’ managers are
advised to have closer attention on profitability, GDP growth rate and interest rate factors in order
to make optimal decision pertaining to capital structure.
Description
A Thesis Submitted to
The Department of Accounting and Finance
Presented in partial fulfillment of the requirement for the
Degree of master of business administration in finance
Keywords
Capital structure, Commercial Banks, Leverage