Determinants of Capital Structure:An Empirical Study on Ethiopian Insurance Industry

Abstract

The aim of this study was to examine the firm-specific, industry-specific and macro-economic determinants of Ethiopian insurance companies’ capital structure decision with the sample size of nine insurance companies, covering the period of 2005-2016.To achieve this objective quantitative research approach and quantitative data were used. The data was obtained from the annual audited financial statement of insurance companies and from NBE. In comply with this objective the study applied panel data model with fixed effect Ordinary Least Square regression. To test the hypotheses those were formulated through the review of available literature, the collected data was organized and checked for the fulfillment of OLS linear regression assumptions and then analyzed using fixed effect linear regression. The finding of the study shows that age of the firm, firm size and growth rate of real GDP have statistically significant and positive relationship with insurance company’s capital structure decision. On the other hand, variables like business risk, tangibility of asset and liquidity have a negative and statistically significant relationship with capital structure of insurance companies However, the relationship to exchange rate, profitability, growth opportunity and non-debt tax shield appear to be statistically insignificant. Depending up on the finding the study recommends that insurance companies in Ethiopia should not focus only on firm specific factors but also on macroeconomic environment so as to make an optimal capital structure decision and also the management of those insurance companies has to be focused on reducing factors that causes earning volatility to enhance earning sustainability. Finally the regulator (NBE) need to address problem of information asymmetry through setting up of rules that will ensure effective disclosures of the insurance companies audited financial statements. Keywords: Capital structure, firm specific factors, macro-economic factors, industry specific factors DOI: 10.7176/RJFA/11-9-02 Publication date: May 31 st 2020