Capital structure and performance of commercial banks in Ethiopia

Abstract

Capital structure decision is one of the most crucial decisions of finance manager since it has . relation with the performance of the firm. This study examines the relationship between capital structure which is proxies by TDTA and TDTC and performance which is proxies by ROA, ROE and NPM of commercial banks in Ethiopia based on eight sample banks for the period from 2000-2012. Panel data were used for the study, collected from annual reports of sample banks analyzed using the fixed-effects techniques. In related with the regression analysis various tests were conducted for the assumption of CLRM. The results of the regression analysis indicate that commercial banks in Ethiopia are highly levered and except significant positive and insignificant positive relation of ROE with TDTC and TDTA, leverage has an inverse relation with performance of the bank. Further, the size of the bank has significant positive association with all performance measurement variables. These findings are consistent with the hypothesis of the study. The finding imply that there are evidence which support both trade off theory and packing order theory of capital structure in the Ethiopian banking industry and capital structure has a positive or negative association with performance. Therefore, the bank makes its capital structure at optimal level by raising funds from equity finance by participating in the secondary market in order to enhance its performance in related with capital structure. Key word: - Capital structure, Financial performance, Commercial banks, ROA, ROE, NPM, TDTA, TDTC, Size. Page