Accounting & Marketing

The Determinants of Capital Structure Decision of Commercial Banks in Ethiopia

Abstract

Tilahun Simegnew*

The capital structure decision is at the center of many other decisions in corporate finance. Corporate financial manager is responsible to ensure low cost of capital and to maximize the wealth of shareholders. The purpose of this study is to investigate the determinants of capital structure decision in commercial banks of Ethiopia for eleven consecutive years (2010-2020) by using explanatory research design and multiple linear regressions. Quantitative research approach was utilized for secondary data analysis which is obtained from the audited financial statements of the sample banks. The study used purposive sampling technique to select eight banks from the total population of 17 commercial banks. The panel data were analysed with a fixed effect regression model. The study used descriptive statistics, correlation analysis and fixed effect multiple regression analysis to present and analyse the collected data. The findings of the study revealed that earnings volatility, profitability, non-debt tax shields, tangibility, and liquidity had the significant effect on capital structure of commercial banks in Ethiopia. But, growth and firm’s size were found to have statistically insignificant effect on the capital structure. Therefore, commercial banks in Ethiopia should pay due attention to earnings volatility, profitability, non-debt tax shields, tangibility, and liquidity while articulating their optimal capital mix which can reduce the weighted average cost of capital and enhance the wealth of the shareholders.