CAPITAL STRUCTURE AND PROFITABILITY: EVIDENCES FROM PRIVATE COMMERCIAL BANKS OF ETHIOPIA

Abstract

The effect of capital structure has been considered to be an important issue on the profitability of private commercial banks. This study empirically examines the effect of capital structure on private commercial banks profitability in Ethiopia and interprets the result. The study used balanced panel model in examining the regression model and collect data from ten private commercial banks covering the period of nine consecutive years, 2009-2017. The study used panel data techniques specifically Random Effect model on the regression analysis and used EView8 software. Before the regression analysis; the researcher test the assumptions of CLRM that are, error of zero mean, normality, heteroscedasticity, autocorrelation and multicollinearity were conducted on the data. The study used two dependent variables ROA and ROE, two independent variables such as total Debt to asset ratio and interest coverage ratio, two control variables size and tangibility and macroeconomic factor inflation. The regression result showed that TDA and TANG have negative and statistically significant effect on ROA at 1% significant level. Whereas; IC, SIZE and INF have positive and statistically significant effect on ROA at 1% ,5% and 1% significant level respectively. In addition, TANG has negative and statistically significant effect on ROE at 1% significant level. While; TDA, IC,SIZE and INF have positive and statistically significant effect on ROE at 1% ,1% ,5% and 5% significant level respectively. The research concluded that capital structure has a significant effect on the profitability of Ethiopian private commercial banks. Finally the recommendations have been forwarded for private banks, management, regulatory body, policy makers and future study on the subject.