DETERMINANTS OF CAPITAL STRUCTURE OF INSURANCE COMPANIES IN ETHIOPIA

Abstract

This paper investigates the determinants capital structure of insurance company in Ethiopian by using eleven years data from 2006 to 2016 and the main objective of this study is to examine the determinants of capital structure of insurance companies in Ethiopia. To achieve the objective the study, the researcher used only secondary data obtained from the annual financial statement of nine insurance companies, National Bank of Ethiopia (NBE) and Ministry of Finance and Economic Development (MoFED). In this study, one dependent variable (leverage) and eight independent variables, that is, GDP, inflation, tangibility, liquidity, firm’s size, firm’s growth, profitability and business risk was employed. Quantitative research approach, explanatory research design, purposive sampling method and classical linear regression model was employed in this study. The balanced panel data was analyzed by using descriptive analysis, correlation analysis, classical linear regression model assumptions and different diagnosis tests and different model estimation tests was employed in this study. The statistical software package (STATA) result of random effect estimates with robust standard error results shows that, inflation, liquidity, firm’s size and firm’s growth are positive and significant effect on determinant of capital structure. GDP, inflation, liquidity, firm’s size, firm’s growth and business risk has positive relationship with the dependent variable. But, tangibility and profitability has not positive relationship with leverage. However, the other independent variables like, GDP, tangibility, profitability and business risk had insignificant impact on capital structure. Finally, the study recommends that the from the firm’s specific variable liquidity, firm’s size and firm’s growth are significant and positive relationship to determining optimum capital structure of Ethiopian insurance Companies. So that the manager of insurance company should be highly use such variables effectively to maximize the values of the organization with minimized weighted average cost.