Journal of Finance and Accounting

| Peer-Reviewed |

Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia

Received: 10 August 2020    Accepted: 24 August 2020    Published: 24 September 2020
Views:       Downloads:

Share This Article

Abstract

This study was conducted on the title determinants of capital structure; evidence from private commercial banks in Ethiopia. To find out what determines capital structure, seven bank specific explanatory variables (Profitability, tangibility, growth, age, tax shield, size and liquidity) was selected and regressed beside the suitable capital structure measure (Debt to Equity Ratio). Fourteen private commercial banks, which had minimum of seven years life were selected for the study. Their audited financial statement from 2013 to 2019 was used as major source of data. Before the analysis of regression model test of CLRM assumptions such as normality, multicollinearity, heteroscedastcity and autocorrelation tests were conducted on the data. After these tests, Hauseman model specification test conducted and its result indicated that Fixed Effect Model was better to test hypotheses that emerge through the review of existing literature. Then inferential statistics regression was done by Fixed Effect Model (FEM). The regression result reveled that profitability, age, tax shield and size had significant effect on leverage. However, among the hypothesized capital structure determinants growth, asset tangibility and liquidity had insignificant effect on capital structure of Ethiopian private commercial bank. In addition, trade-off theory and the pecking order theory explained the capital structure behavior of banking industry in Ethiopia.

DOI 10.11648/j.jfa.20200805.13
Published in Journal of Finance and Accounting (Volume 8, Issue 5, September 2020)
Page(s) 221-229
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Capital Structure (Leverage), FEM, Trade-off Theory, Packing Order Theory, Private Commercial Bank

References
[1] Anafo, S. A., Amponteng, E., & Yin, L. (2015). The impact of capital structure on profitability of banks listed on the Ghana stock exchange. Research Journal of Finance and Accounting, 6 (16), 27-34.
[2] Aregawi, G. (2010, May). Determinants of Capital Structure: Evidence from Commercial Banks in Ethiopia”.
[3] Baker, M., & Wurgler, J. (2002). Market timing and capital structure. The Jourinal of Finance, LVII (1), 1-32.
[4] Baker, M., & wurgler, J. (2013). Do strict capital requirements raise the cost of capital? Banking regulation and the low risk anomaly. NBER Working Paper (19018).
[5] Bauer, P. (2004). Determinants of Capital Structure: Empirical Evidence from the Czech Republic. Journal of Economics and Finance, 1-21.
[6] Booth, L., Aivazian, v., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital structure in developing countries. The Journal of Finance, 56 (1), 87-130.
[7] Brigham, E. F., & Houston, J. F. (2009). Fundamentals of Financial Management. Canada: South-Western Cengage Learning.
[8] Brigham, E., & Daves, P. (2007). Intermediate Financial Management (9th ed.). Natorp Boulevard Mason, USA: Thomson Higher Education.
[9] Bruce, P. T., & Pradip, T. (2008). The Impact of Capital Structure on Economic Capital and Risk Adjusted Performance. ASTIN Bulletin, 341-380.
[10] Creswell, J... (2009). Research Design: Qualitative, Quantitative and Mixed Methods Approaches (3rd ed.). California: Sage Publications.
[11] De Jonghe, O. (2010). “Back to the basics of banking? A micro analysis of banking system stability. Journal of Financial Intermediation, 387-417.
[12] Fazzari, S. M., & Petersen, B. C. (1993). Working Capital and Fixed Investment: New Evidence on Financing Constraints. The RAND Journal of Economics, 24, 328-342.
[13] Donaldson, G. (1961). Corporate Debt Capacity: A Study of Corporate Debt Policy andthe Determination of Corporate Debt Capacity. Division of Research, GraduateSchool of Business Administration, Harvard University, Boston. Economics. 113: 387-432.
[14] George, G., & Mary, R. (2014). Capital Structure of Kenyan Firms: What determines it? Research Journal of Finance and Accounting, 118-124.
[15] Giday, G. G. (2016). The impact of capital structure on profitability of Commercial Bank of Ethiopia. Journal of Poverty, Investment and Development, 28, 17-36.
[16] Greene, W. H. (2008). ECONOMETRIC ANALYSIS (6th ed.). Upper Saddle River, New Jersey: Pearson Education, Inc.
[17] Grigore, M. Z., & Stefan-Duicui, V. M. (2013). Agency theory and optimal capital structure. Challenges of the Knowledge Society. Economics, 863-868.
[18] Gujarati, D. N. (2004). Basic Econometrics (4th ed.). West Point: The McGraw−Hill Companies.
[19] Harris, M., & Raviv, A. (1991). The theory of capital structure. TheJournal of Finance, 16 (1), 297-355.
[20] Hoa, N., & Zainab, K. (2013). Determinants of banks’ capital structure in Asia A comparison amongst developed and developing countries.
[21] Jahanzeb, A., Rehman, S.-U., Bajuri, N. H., Karam, M., & Ahmadimousaabad, A. (2013). Trade-Off Theory, Pecking Order Theory and Market Timing Theory: A Comprehensive Review of Capital Structure Theories. International Journal of Management and Commerce Innovations (IJMCI), 01 (01), 11.
[22] Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, Agency costs and ownership structure. Journal of Financial Economies, 305-360.
[23] Jensen, M. C. (1986) Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. The American Economic Review, 76, 323-329.
[24] Kibrom, F. M. (2010, May). Determinants of Capital Structure: Evidence from Commercial Banks in Ethiopia.
[25] Mazur, K. (2007, September 2). The Determinants of Capital Structure Choice: Evidence from Polish Companies. International Advances in Economic Research, 13 (4), 495–514.
[26] Malcolm Baker and Jeffrey Wurgler (2013). Handbook of the Economics of Finance, 2, 357-424.
[27] Mohammed, G. (2016). Capital Structure and Financial Performance of Insurance Industries in Ethiopia. Global Journal of Management and Business Research, 16 (7), 45-53.
[28] Mooij, R. d., Keen, M., & Orihara, M. (2013). Taxation, Bank Leverage, and Financial Crises. Internationa Monetary Fund, Working Paper, 1-25.
[29] Muhammed, A., Ashenafi, B., & Netsanet, S. (2015, December). Does capital structure on performance of banks? (A study in commercial banks in Ethiopia). International Journal of Scientific and Research Publications, 5 (12), 643-654.
[30] Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39 (3), 575-592.
[31] Myers, S. C. (2001, January). Capital Structure. The Jounal of Economic Perspective, 15 (2), 81-102.
[32] Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information the investors do not have. Journal of Financial Economics, 187-221.
[33] National Bank of Ethiopia. (2019). Annual report, Adiss Abebe. Ethiopia.
[34] Ogbulu, O. M., & Emeni, F. K. (2012). Determinants of corporate capital structure in Nigeria. International Journal of Economics and Management Sciences, 1 (10), 81-96.
[35] Papagianni, E. E. (2013, December). Determinants of the capital structure of banks in European Union.
[36] Rajan, R., & Zingales, L. (1995, December). What Do We Know about Capital Structure? Some Evidence from International Data. The Journal of Finance, 50 (5), 1421-1460.
[37] Sasho, A., & Aleksandar, N. (2016). Determinants of capital structure: An empirical study of companies from selected post-transition economies. Preliminary communication, 34, 119-146.
[38] Reyna, O. T. (2007). Panel Data Analysis Fixed and Random Effects using Stata. Princeton Universty.
[39] Titman, S., & Wessels, R. (1988, March). Determinats of capital structure choice. The Journal of Finance, 43 (1), 1-19.
[40] Van Horne, J. C. (1971). Financial Management and Policy (2nd ed.). United States of America: PRENTICE-HALL, INC., ENGLEWOOD.
[41] Van Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of Financial Management (13th ed.). Harlow England: Pearson Education.
[42] Weldemikael, S. (2012, June). Determinants of Capital Structure of Commercial Banks in Ethiopia.
Author Information
  • Department of Accounting and Finance, Mekdela Amba University, Mekane Selam, Ethiopia

Cite This Article
  • APA Style

    Tamiru Anley Alebachew. (2020). Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia. Journal of Finance and Accounting, 8(5), 221-229. https://doi.org/10.11648/j.jfa.20200805.13

    Copy | Download

    ACS Style

    Tamiru Anley Alebachew. Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia. J. Finance Account. 2020, 8(5), 221-229. doi: 10.11648/j.jfa.20200805.13

    Copy | Download

    AMA Style

    Tamiru Anley Alebachew. Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia. J Finance Account. 2020;8(5):221-229. doi: 10.11648/j.jfa.20200805.13

    Copy | Download

  • @article{10.11648/j.jfa.20200805.13,
      author = {Tamiru Anley Alebachew},
      title = {Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia},
      journal = {Journal of Finance and Accounting},
      volume = {8},
      number = {5},
      pages = {221-229},
      doi = {10.11648/j.jfa.20200805.13},
      url = {https://doi.org/10.11648/j.jfa.20200805.13},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.jfa.20200805.13},
      abstract = {This study was conducted on the title determinants of capital structure; evidence from private commercial banks in Ethiopia. To find out what determines capital structure, seven bank specific explanatory variables (Profitability, tangibility, growth, age, tax shield, size and liquidity) was selected and regressed beside the suitable capital structure measure (Debt to Equity Ratio). Fourteen private commercial banks, which had minimum of seven years life were selected for the study. Their audited financial statement from 2013 to 2019 was used as major source of data. Before the analysis of regression model test of CLRM assumptions such as normality, multicollinearity, heteroscedastcity and autocorrelation tests were conducted on the data. After these tests, Hauseman model specification test conducted and its result indicated that Fixed Effect Model was better to test hypotheses that emerge through the review of existing literature. Then inferential statistics regression was done by Fixed Effect Model (FEM). The regression result reveled that profitability, age, tax shield and size had significant effect on leverage. However, among the hypothesized capital structure determinants growth, asset tangibility and liquidity had insignificant effect on capital structure of Ethiopian private commercial bank. In addition, trade-off theory and the pecking order theory explained the capital structure behavior of banking industry in Ethiopia.},
     year = {2020}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia
    AU  - Tamiru Anley Alebachew
    Y1  - 2020/09/24
    PY  - 2020
    N1  - https://doi.org/10.11648/j.jfa.20200805.13
    DO  - 10.11648/j.jfa.20200805.13
    T2  - Journal of Finance and Accounting
    JF  - Journal of Finance and Accounting
    JO  - Journal of Finance and Accounting
    SP  - 221
    EP  - 229
    PB  - Science Publishing Group
    SN  - 2330-7323
    UR  - https://doi.org/10.11648/j.jfa.20200805.13
    AB  - This study was conducted on the title determinants of capital structure; evidence from private commercial banks in Ethiopia. To find out what determines capital structure, seven bank specific explanatory variables (Profitability, tangibility, growth, age, tax shield, size and liquidity) was selected and regressed beside the suitable capital structure measure (Debt to Equity Ratio). Fourteen private commercial banks, which had minimum of seven years life were selected for the study. Their audited financial statement from 2013 to 2019 was used as major source of data. Before the analysis of regression model test of CLRM assumptions such as normality, multicollinearity, heteroscedastcity and autocorrelation tests were conducted on the data. After these tests, Hauseman model specification test conducted and its result indicated that Fixed Effect Model was better to test hypotheses that emerge through the review of existing literature. Then inferential statistics regression was done by Fixed Effect Model (FEM). The regression result reveled that profitability, age, tax shield and size had significant effect on leverage. However, among the hypothesized capital structure determinants growth, asset tangibility and liquidity had insignificant effect on capital structure of Ethiopian private commercial bank. In addition, trade-off theory and the pecking order theory explained the capital structure behavior of banking industry in Ethiopia.
    VL  - 8
    IS  - 5
    ER  - 

    Copy | Download

  • Sections