Firm-specific and country-level determinants of commercial banks capital structures: evidence from Ethiopia

Abstract

Since the seminal work of MM irrelevance theory, there has been a long history of controversy among academicians both in developed and developing nations regarding the determinants of capital structure. To this end, the main aim of this study was to investigate firm-specific and country-level determinants of the capital structure of Ethiopian commercial banks. The study adopted an explanatory research design with a quantitative research approach. A panel dataset was obtained from 14 commercial banks, which range from 2010 to 2022. A random effect panel regression result revealed that tangibility, non-debt tax shields, growth, and interest rate had a positive and significant effect, while the gross domestic product had a negative and significant effect on leverage which is used as a measure of capital structure. Among the independent variables tested, ROA, liquidity, effective tax rate, risk, and inflation have an insignificant effect on the capital structure of the selected commercial banks. The study will have implications for managers of commercial banks, legislators, regulators, and other interested parties that can use the study's conclusions to help them make well-informed capital decisions and implement the necessary measures to enhance the financial performance of Ethiopian banks with an optimal ratio of debt to equity.