Firm-Specific Determinants of Insurance Companies’ Capital Structure in Ethiopia

Abstract

This study examines the impact of firm-specific characteristics on capital structure (CS) decisions of the Ethiopian insurance industry. The study used panel-fixed effects robust standard error regression models, the DEBT model, and the DE model using financial statements of eight insurance companies covering the period from 2005 to 2014. To validate the results, it conducted normality, multi-collinearity, heteroskedasticity, autocorrelation, and robustness tests. We found pecking order, static trade-off, and agency cost theories as the most important in explaining CS decisions of insurance companies in Ethiopia though the pecking order theory appeared to be dominant. The empirical findings of the models indicate that profitability and liquidity are significant in determining Ethiopian insurance companies’ financing decisions, while business risk and size of the firm are insignificant in shaping their behavior. On the other hand, firms’ asset tangibility and growth opportunities had a significant impact on the total debt ratio, while these factors were insignificant for the debt–equity ratio.