DETERMINANTS OF CAPITAL STRUCTURE: EMPIRICAL EVIDENCE FROM COMMERCIAL BANKS IN ETHIOPIA

Abstract

Determinants of capital structure: Empirical evidence from commercial banks in Ethiopia. This study examine the impact of independent variable which are profitability, growth of bank, size of banks, dividend payout, asset tangibility, liquidity, net debt tax shield, risk, GDP, and inflation on the formation of capital structure of commercial banks in Ethiopia. The sample in this study includes fourteen commercial banks operate during the study period. The panel data cover for six years from 2011 to 2016. The study used quantitative individual banks’ audited annual financial reports (balance Sheet and Income/Loss statement) of secondary data. The study used quantitative research approach and panel data regression. From the regression results; liquidity and asset tangibility are identified negative and significant relationship with leverage ratio. In the case of growth, dividend and net debt tax shield of bank, the regression result identified positive and significant relation with leverage. Independent variables such as size, risk, GDP and inflation have positive but insignificant relationship with leverage ratio. On the contrary profitability has negative and insignificant impact on the formation of capital structure of banks during the study period. The study recommends that commercial banks in Ethiopia need to remain profitable in order to rely less on external debt as a source of financing.