DETERMINANTS OF CAPITAL STRUCTURE IN ETHIOPIAN INSURANCE COMPANIES

Abstract

This study empirically examines the determinants of capital structure of insurance companies in Ethiopia. The study tried to identify the specific firm and macroeconomic factors that managers should consider when deciding their optimal capital structure. The study employed fixed effect panel regression model in examining the capital structure of insurance companies in Ethiopia with financial statements of 9 insurance companies covering the period of eleven years, 2005-2015. The model (fixed effect panel regression model) fitness was tested using normality, multicollinearity, Heteroskedasticity, autocorrelation and redundant fixed effects tests on the data used for the model. The results show that pecking order theory is prominently important in explaining the capital structure of insurance companies in Ethiopia. Firm specific factors such as asset tangibility, growth, liquidity and size of the firm were found to be significant in relation to leverage. Though insignificant, the negative relationship between profitability and leverage is an indication that profitable insurance companies prefer internal sources of finance to external sources, hence less debt in their capital structure. Macroeconomic factors used in this study, GDP and inflation were positively related with leverage at significant level of 1%. The study indicated that the independent firm specific variables of size, asset tangibility, growth and liquidity and macroeconomic variable of GDP and inflation were significantly related to leverage. Therefore, managers of the insurance companies should consider the impact of these significant variables in determining their financing needs so as to maximize the value of the company and meet the shareholders return to the extent that gives value for their invested money.