THE EFFECT OF CAPITAL STRUCTURE ON PROFITABILITY OF PRIVATE COMMERCIALBANKS IN ETHIOPIA

Abstract

This study investigated the effect of capital structure on private commercial banks profitability in Ethiopia. The study use a ten-year panel data period (2013-2022) from ten private commercial banks. The study employ explanatory research design along with quantitative approach. Profitability was assessed using Return on Assets (ROA) and Return on Equity (ROE). Two independent variables (debt to asset and debt to deposit rations) and two control variables (size and spread) were used. The result shows that debt to total asset and spread has a statically significant positive effect on private banks profitability as measured by ROA. However, when ROE is used as a measure of profitability, the study fails to find a statically significant effect of capital structure on bank’s performance. Overall, the study suggests a positive association between capital structure and profitability, which is in line with the pecking order theory