IMPACT OF COMPETITION ON CAPITAL STRUCTURE DECISION IN ETHIOPIAN INSURANCE COMPANIES

Abstract

Capital structure decision is one of the key decisions in strategic financial management. But it is important to be aware of what factor determines this decision and its extent. Industry specific characteristic, competition is one of the factor and the aim of this study is to empirically investigate the impact of this industry specific characteristic, competition on capital structure decision of Ethiopian insurance companies using ten years data (2007-2016) of nine insurance companies in Ethiopia which have started producing financial statements at year 2007.to identify the extent to which completion affects financing decision of Ethiopian insurance companies some significant firm specific and macroeconomic variables (profitability, tangibility, liquidity, firm size and inflation rate) were controlled. The study employed random effects model after Hausman and Breusch and Pagan Lagrangian multipier test to regress explanatory variables on leverage ratio of Ethiopian insurance companies with the help of STATA software package. The result of this study suggests that competition were affecting financing decision of Ethiopian insurance firms positively with strong significance. In light of a negative relationship between competition and economic profit, the finding of this study which is a strong positive relationship between competition and leverage was in conformity with pecking order theory. Control variables, profitability and firm size were appeared to have a positive and significant relationship with leverage ratio of Ethiopian insurance firms whereas as tangibility, liquidity and inflation rate were appeared to have a negative and significant relationship with leverage ratio of Ethiopian insurance companies.