Determinants Of Capital Structure In Commercial Banks Of Ethiopia

Although there have been many prior studies on the determinants of capital structure, thernquestion of what determines the best financing mix that maximizes a firm’s value is still the mostrndebatable issue in corporate finance. Besides, a great deal of previous studies focused mainly onrndeveloped countries’ non-financial firms paying little attention to developing countries andrnfinancial sector. Therefore, this study attempted to fill the gap by analyzing the capital structurernfor commercial banks in Ethiopia. As a result, this study has examined the relationship betweenrnleverage and firm specific (profitability, liquidity tangibility, risk, size and growth) determinantsrnof capital structure decision, and the capital structure theory that can explicate the capitalrnstructure of banks in Ethiopia. Quantitative research approach was utilized for data analysis byrncollecting secondary data in the form of document review. The study has used purposivernsampling technique to select among eighteen banks currently operating in Ethiopia. Morernspecifically, the study has used nine years (2011 - 2019) data for nine banks in Ethiopia. Thernpanel data were analyzed with a clustered robust random effect regression model. The findingsrnshow that, size, tangibility, profitability and growth of the banks are important determinants ofrncapital structure of banks in Ethiopia. But, risk and liquidity of banks are found to have nornstatistically significant impact on the capital structure of banks in Ethiopia. The empiricalrnfindings of the study mean that the two capital structure theories, static trade-off and peckingrnorder, are explaining the capital structure decision of Ethiopian commercial banks. Commercialrnbanks in Ethiopia should pay due attention to the microeconomic variables without overlookingrnthe macroeconomic condition while articulating their optimal capital mix which can reduce thernweighted average cost of capital and enhance the wealth of the company. Therefore, banksrnshould give attention to profitability, tangibility, size and growth when they determine theirrnoptimum capital structure.

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