DETERMINANTS OF CAPITAL STRUCTURE IN COMMERCIAL BANKS:EVIDENCE FROM PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

Determining the optimal capital structure is one of the most fundamental policy decisions faced by financial managers. Since optimal debt ratio influences firm’ s value, different firms determine capital structures at different levels to maximize the value of their firms. Thus, this study examines the relationship between leverage and firm specific (profitability, tangibility, growth, age, and size) determinants of capital structure decision, and the theories of capital structure that can explain the capital structure of banks in Ethiopia. In order to investigate these issues a mixed method research approach is utilized, by combining documentary analysis and in depth interviews. More specifically, the study uses ten years (2007 - 2016) data for six banks in Ethiopia. The findings show that profitability, size, tangibility of the banks are important determinants of capital structure of banks in Ethiopia. However, growth of banks was found to have no statistically significant impact on the capital structure of banks in Ethiopia. In addition, the results of the analysis indicate that pecking order theory is pertinent theory in Ethiopian banking industry, whereas there was little evidence to support static trade-off theory and the agency cost theory. Therefore, banks should give consideration to profitability, size, and tangibility when they determine their optimum capital structure.