Determinants of capital structure and its impact on the performance of Ethiopian insurance industry

Abstract

An appropriate capital structure is a critical decision for any business organization to be taken by business organization for maximization of shareholders wealth and sustained growth. The mainobjectives this study wasexamining the determinants of capital structure and its impact on the performance of Ethiopian insurance industry. Thus, the major focus of this study was to investigate empirically firm specific factors such as, firm leverage, growth opportunities, size, risk, tangibility and liquidity were impacts on performance in Ethiopian insurance industry. To achieve the research objectives panel analysis was used. In this study, the researcher used only secondary data. All insurance companies were included in the sample frame if they had Ten years annual report. Document review has beenused for collecting data from 2004-2013 annual reports. The statistical tests were used includes: descriptive statistics, correlation, specific linear assumption and fixed effect regression estimation model, a relationship was established between firm specific factors and performance,measures return on asset (ROA) of the firms over a period of ten years. The results show that firm leverage, Size, tangibility and business risk were significant impact on performance of Ethiopian insurance companies. While firm growth and liquidity were not clear and statistical proved relationship are obtained from the regression analysis. The results provide strong evidence in support of the pecking order theory of capital structure which asserts that leverage was a significant determinant of firms' performance. A significant negative relationship is established between leverage and performance. From the findings the researcher recommended that the sample of Ethiopian insurance industry use more equity than debt in financing their business activities, this because if the value of business can be enhanced with debt capital, it is dangerous for the firm. Each Ethiopian insurance industryestablishes with the aid of professional financial managers, that particular debt-equity mix that maximizes its value and minimizes its weighted average cost of capital.