The Effect of Capital Structure Choice on Financial Performance: Evidence from Ethiopian Banking Industry

Abstract

Capital structure is the most significant aspect of company’s decision making process that has been debated for a long by scholars for its effects on the financial performance. The current study tried to provide empirical evidence on such debates using data from Ethiopian banking industry. Capital structure theories have been utilized to provide the theoretical basis for the work. The study applied a balanced panel data of eight Ethiopian commercial banks for six years (2006- 2011). The audited annual reports (Balance sheet and income statements) of Ethiopian commercial bank were obtained from National Bank of Ethiopia (NBE). Pooled Ordinary Least Square (OLS) techniques are used to estimate the regression models.The estimation results showed that Ethiopian banks capital structure which is measured by equity capital ratio had a significant negative effect on the financial performance i, e higher capital ratio is associated with lower financial performance. This finding of the study is consistent with the agency cost theory. Furthermore, except deposit fund and bank credit risk all the bank specific variable has no significant impacts on the financial performance of Ethiopian banking industry. The result of the study is of value to policy making, practice and further research.

Keywords: Capital Structure, Financial Performance, OLS regression, Ethiopian Commercial Bank, Ethiopia