DETERMINANTS OF CAPITAL STRUCTURE DECISIONS IN CONSTRUCTION COMPANIES IN ETHIOPIA

Abstract

Selection of an optimal capital structure is always a critical issue for every firm. The reason for this is of course, financial risk and tax advantage which are directly influenced by a company’s choice of capital structure. The choice of capital structure is influenced by certain factors. However these factors are still not very clear. The purpose of this study is to examine the determinants of capital structure for construction companies in Ethiopia. The factors which were tested are; profitability, tangibility of assets, age of the firm, earning volatility, growth of the firm, size of the firm, liquidity and non-debt tax shields. In order to investigate these issues a quantitative method research approach is utilized, by a documentary analysis. More specifically, the study uses five years (2011 - 2015) data for 13 construction firms in Ethiopia. The result reveals that the variables including profitability, tangibility of assets, age of the firm, earning volatility, growth of the firm, size of the firm, liquidity negatively affect the capital structure of construction companies. Non-debt tax shields on the other hand, inversely affects their capital structure. In addition, the results of the analysis indicate that pecking order theory is pertinent theory in Ethiopian construction industry, whereas there are little evidence to support static trade-off theory. Therefore, construction companies should give consideration to profitability, tangibility of assets, age of the firm, earning volatility, growth of the firm, size of the firm And liquidity when they determine their optimum capital structure.