THE EFFECT OF CAPITAL STRUCTURE ON FIRM PROFITABILITY (The case of Ethiopian commercial banks)

Abstract

This study was aimed to investigate the effect of capital structure on firms‘ profitability with special emphasis on Ethiopian commercial banks Firms using panel data of nine consecutive years (2014 E.C-2022 E.C). The secondary data sources (audited financial statements) have been collected from the randomly selected nine Ethiopian commercial banks firms in Ethiopia. Linear regression model has been employed to analyze the relationship between firms‘ profitability and capital structure. The study employed EView8 software and panel data methodologies, particularly the Random Effect model for regression analysis. The researcher tested the CLRM assumptions error of zero mean, normality, heteroskedasticity, autocorrelation, and multicollinearity—on the data prior to the regression analysis. The study used two dependent variables ROA and ROE; three independent variables such as debt to asset ratio, debt to equity ratio and interest coverage ratio, two control variables size and tangibility and macroeconomic factor inflation. The regression result showed that variables DTAR, IC, TAN, FIRM SIZE and INF have positive and statistically significant effect on ROA at 1%, 1%, 5%, 5% and 1% significant level respectively. Whereas; DTER have negative and statistically significant effect on ROA at 1% significant level. In addition to all independent variables DTAR, IC, FIRM SIZE, TAN and INF have positive and statistically significant effect on ROE have at 1%, 1%, 5%, 1% and 5% significant level respectivelyThe research concluded that capital structure has a significant effect on the profitability of Ethiopian commercial banks in Ethiopia. Finally the recommendations have been forwarded for commercial banks, management, regulatory body, policy makers and future study on the subject.Key Words: Capital structure, profitability, commercial banks in Ethiopia.