Abstract
This study was conducted on the title determinants of capital structure; evidence from private commercial banks in Ethiopia. To find out what determines capital structure, seven bank specific explanatory variables (Profitability, tangibility, growth, age, tax shield, size and liquidity) was selected and regressed beside the suitable capital structure measure (Debt to Equity Ratio). Fourteen private commercial banks, which had minimum of seven years life were selected for the study. Their audited financial statement from 2013 to 2019 was used as major source of data. Before the analysis of regression model test of CLRM assumptions such as normality, multicollinearity, heteroscedastcity and autocorrelation tests were conducted on the data. After these tests, Hauseman model specification test conducted and its result indicated that Fixed Effect Model was better to test hypotheses that emerge through the review of existing literature. Then inferential statistics regression was done by Fixed Effect Model (FEM). The regression result reveled that profitability, age, tax shield and size had significant effect on leverage. However, among the hypothesized capital structure determinants growth, asset tangibility and liquidity had insignificant effect on capital structure of Ethiopian private commercial bank. In addition, trade-off theory and the pecking order theory explained the capital structure behavior of banking industry in Ethiopia.
Highlights
Capital structure is a method in which a firm’s assets are financed
Explanatory research is defined as an attempt to connect ideas to understand cause and effect relation of variables. This indicates that this study focused on identifying the relationship of explanatory variables and the dependent variable
This study examined determinants of capital structure of private commercial Banks in Ethiopia
Summary
Capital structure is a method in which a firm’s assets are financed. It is a combination of different types of equity and debt capital that firms kept resulting from its’ financing decisions [27]. Sound capital structure of a company, helps to rises firms value, utilization of available funds, minimization of cost of capital and to manage solvency or liquidity position. It enables banks to acts as a buffer to absorb losses incurred in times of financial stress. Therefor sound capital structure in bank provides security and safeguard to depositors and lender [9]. Bank quiet has to rely on high level of debt to finance its ongoing and main business of lending
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