The Determinants of Capital Structure: Evidence from Commercial Banks in Ethiopia

Although there have been many prior studies of the determinants of capital structure, the question of what determines the best financing mix that maximizes a firm’s value is still the most debatable issue in corporate finance. Besides, a great deal of previous studies focused mainly on developed countries’ non-financial firms paying little attention to developing countries and financial sector. Therefore, this study attempted to fill the gap by analyzing the capital structure for commercial banks in Ethiopia. This paper approached the issues of capital structure by evidencing commercial banks in Ethiopia to uncover the firm level determinant factors of capital structure. To discover what determines capital structure, six firm level explanatory variables (Profitability, Tangibility, Size, Growth, Age and Tax- Shield) were selected and regressed against the appropriate capital structure measure (Debt to Equity Ratio). A sample of seven commercial banks was taken and secondary data were collected. Consequently, multivariate regression analysis was made based on financial statement data of the selected commercial banks over the study period of 2000 - 2009 E.C. The major findings of the study indicated that profitability, size, age and tax-shield variables are the significant firm level determinants of capital structure in Ethiopian commercial banks case. In addition to this, the two variables (profitability and growth) established negative relationship and the remaining four variables (tangibility, size, age and tax-shield) showed positive relationship with capital structure. Far beyond this, it is also revealed that there is consistency between profitability and Pecking order theory, tangibility and Static Trade-off theory, Pecking order theory and Agency cost Theory; both variables size and growth and Static Trade-off theory and Agency cost Theory; and variables age and tax-shield and Static Trade-off Theory in Ethiopian commercial banking case.