YIC ONLINE

YARDSTICK INTERNATIONAL COLLEGE

COLLEGE OF POSTGRADUATE STUDIES DEPARTMENT
OF BUSINESS ADMINSTRATION ONLINE PROGRAM
COURSE: - FINANCIAL MANAGEMENT (MBA 711)
ASSIGNMENT 01
BY: SEMAHEGN AMARE ADISU
INSTRUCTOR – KASSU BIRBIRSA (ASS.PROF)
ID: - MAO/1519/13
TITLE: - DEPOSITORY INSTITUTION
SUBMITTED DATE; AUGUST 09, 2022

YARDSTICK INTERNATIONAL COLLEGE, ADDIS ABABA,

ETHIOPIA

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Table of contents

1. Introduction...................................................................................................................................3

1.1. Statement of Problem.............................................................................................................3

1.2. Objectives of the Study..........................................................................................................4

1.2.1. General Objective..........................................................................................................4

1.2.2. Specific Objective...........................................................................................................4

1.2.3. Data used.......................................................................................................................4

1.2.4. Method of data analysis.................................................................................................4

1.2.5. Findings..........................................................................................................................5

2. Conclusion.....................................................................................................................................6

2.1. Recommendation...................................................................................................................6

2.2. Strength and Weakness..........................................................................................................7

2.2.1. Strength.........................................................................................................................7

2.2.2. Weakness.......................................................................................................................7

2.3. Bibliography..........................................................................................................................7

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 1. Introduction

In this section the problem statement, and objectives of the study, data used method of data
analysis, Findings, Conclusions, recommendations and implications. Which ultimately build
on this study includes the strength and the weakness of the article review of the determinant
of capital structure decision.

1.1. Statement of Problem

Over the previous years, numerous studies on capital structure theory have appeared.
However, based on the research made by Myers (1984), it is stated that each of the theories
on capital structure applied are based on certain circumstances. As such, the theories are not
designed to be general rather they are conditional theories of capital structure; each of which
emphasizes on certain costs and benefits of alternative financing strategies. Most capital
structure studies to date are based on data from developed countries’ firms and very few
studies provide evidence from developing countries. The capital structure of financial firm
has not also been investigated; there is no clear understanding on how banks construct their
capital structure and what internal (firm-specific) factors influence their corporate financing

decision. Therefore, given the unique features of financial institution and the environment in
which they operate, there is a strong ground to conduct separate study on capital structure
determinants in financial institution. This study, therefore, tried to examine determinants of
capital structure of the banking institutions environment by using its internal (firm-specific)
determining factors. Some countries differ from other developing countries previously
studied in such a way it has no secondary capital market which makes things easier for firms
to raise funds and choose the best mix of debt and equity sources. In general, the reviewer is
fascinated to conduct this study because of the following motives:

- There is no clear evidence about the potential determinants of capital structure of

banking institutions.
- There is no clear evidence whether the financing decisions made by commercial
banks provide empirical support for the existing capital structure relevancy theories.

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Therefore, this paper fills the stated gap by identifying the factor that determine capital
structure decision and providing additional facts to the theories of capital structure relevancy
evidencing commercial banks in Ethiopia.

1.2. Objectives of the Study

1.2.1. General Objective

The general objective of this study is to analyze the internal (firm level) factors determining
capital structure decisions of banking institutions.

1.2.2. Specific Objective

Specifically, the study attempts to address the following objectives:

- To measure the effect of change in profitability on the financing mix (leverage) of

banking institutions,
- To determine the consequence of change in the tangibility of assets held by banking
institutions on the debt to equity ratio,

- To find out the extent to which variations in bank size explain the variations in debt
to equity ratio of commercial banking business ,

- To verify if capital structure decisions that are made in the banking institutions
provide empirical support for existing theories.

1.2.3. Data used

This section presents the article review design and methodology that is employed to achieve
the objective of the review work. As the study employs a qualitative approach it begins with
the Qualitative review design, data type and source, population and sample design, goes on
describing the determinant of capital structure decision banking institutions and its

comparison in different scholars are dealt. because the system shows the following key points
which are focused on the empirical evidence and open-ended surveys and focused on groups
of different banking institutions which clarifies determinant capital structure of decision and
this article maps on the case studies that checked by different scholars in different years.

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 1.2.4. Method of data analysis

The data analysis technique follows a quantitative approach by making use of quantitative
analysis. The secondary data are collected and summarized in an excel data base
containing the variables identified and exported to statistical software package known as
STATA 11. Descriptive statistics such as percentage, mean, and frequencies, and
graphical presentations and tables are used to decode the data which are collected from
both sources. The quantitative analyses in assessing the determinants the capital structure
of Ethiopian MFI are done using PDMRA. Panel data allows us to control for variables
we cannot observe or measure like cultural factors or differences in business practice
across firms, or variables that change overtime (Baum, 2006). Thus, it accounts for
individual heterogeneity. However, there are two techniques used to analyze panel data:
Fixed Effects and Random Effects Model. I used a specific historical document
applicability has been a popular area also in Turkey since 1980s with a view to
interpreting it for its historical significance. I used to understand the study and reported it
by naturalistic observation how to identify the meaning of determinant capital of structure
of decision of in banking institution of Ethiopia.

1.2.5. Findings

The selected explanatory variables confirmed that four of the explanatory variables
(profitability, size, age and tax-shield) are the significant firm-specific determinant factors of
capital structure in the banks. On the other hand, both profitability and growth variables are
found to be negatively related to debt to equity ratio.

In testing the consistency of the capital structure relevancy theories with the capital structure
decisions made in the sampled banks, the researcher found that all the suspected determinant
factors, except profitability, of capital structure decisions in the commercial banks indicate a
strong compliance to the Static trade-off theory. However, the negative effect of profitability
on capital structure decision confirmed a strong compliance to the pecking order theory of
capital structure. In addition, the signs of tangibility and size are consistent with Agency cost
theory predictions.

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 2. Conclusion

Capital structure remains an important and significant issue for academicians and
corporate managers. This area has been researched by many prominent scholars, namely
Modigliani and Miller, Stewart Myers, Stephen Ross, Michael Jensen and William
Mackling. However capital structure has extensively been studied in the developed
countries, but only few researches focus on developing countries like Ethiopia. In this
research project, the main objective is to study the significant firm-specific determinants
of capital structure in the context of banking institution in Ethiopia.

Scholars in trying to understand and decipher capital structure have come up with many
theories. Among the famous theories are Modigliani and Miller propositions, Static
tradeoff, Pecking order and Agency Cost. After reviewing the theories involved in capital
structure, Titman and Wessels (1988), Harris and Raviv (1991) and Frank and Goyal
(2003) also researched the determinants of capital structure. In this study, firm-specific
determinants (internal factors) were examined in the context of Ethiopia.

2.1. Recommendation

The findings of the study are deemed to benefit investors, professional managers, lenders,
academicians and policy makers in the country. Therefore, the writer has, based on the
major findings discussed above, drawn the following recommendations to investors,
commercial banks, lenders, policy makers in Ethiopia and academicians. Suggestions for
further research are also forwarded. External investors and shareholders should appreciate the
discussed variables that determine the capital structure of a particular banking institution and
observe its performance before making decisions of whether or not to buy or sell its particular
stock when secondary market begins to operate in Ethiopia. Before lenders seek to protect
themselves from excessive use of corporate leverage through the use of protective covenants,
they should consider the capital structure determinant variables studied above to evaluate and
predict the risk associated with lending capital to their respective borrowers. Capital markets
are, therefore, one of the instruments that potentially switch companies’ financing from short
to long-term securities and investors’ attention from short-term investments to long-term
investments in addition they promote the mobilization of private investment on public debt
and equity issues.

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 2.2. Strength and Weakness

2.2.1. Strength

Brings together what has been accomplished without repetition and identifying gaps or
omission all within a summation. This can help determine if all the literature needs to
consider making an informed decision on a topic, or if a subset can be reviewed due to
theoretical perspective, population group, or setting of the study is a strong addition to the
quantitative elements of a study.

2.2.2. Weakness

There is not set method to make sure all the literature on a topic was considered. The chances
of the review being biased increases. Does not require the methods of searching, synthesis, or
analysis of literature be explicitly stated. The main goal it so identifies all the literature on the
topic to start the evaluation of a topic and is not the finial evaluation products dependent upon
the searcher to demonstrate value added that the variety of methods and findings the studies
give. There is also difficulty in evaluating the different qualitative and quantitative results.

2.3. Bibliography

Abor, J. (2008). Determinants of the Capital Structure of Ghanaian Firms. African Economic
Research Consortium, Nairobi, 176, 1-34. Amidu, M. (2007). Determinants of capital
structure of banks in Ghana. Journal of Management, 2, 67-79.Ashenafi, B. (2005).
Determinants of Capital Structure in Medium Enterprises in Ethiopia. Research paper,
Submitted to Addis Ababa University, School of Graduates, Ethiopia. Barclay, M. & C.W.
Smith (1999). The Capital Structure Puzzle: Another look at the evidence. Journal of Applied
Corporate Finance, 12, 8-20. Bas, T., Gulnur, M., & Kate, P., (2009). Determinants of
Capital Structure in Developing Countries. Research Paper Series. Cass Business School,
106 Bunhill Row, London EC1Y 8TZ, U.K. Benito, A. (2003). The Capital Structure
Decisions of Firms: Is There A Pecking Order? Bank of Spain, Document 0310.
Benton, G. & James, K. (2005). Commercial Banking: The Management of Risk. 3rd Edition,
John Wiley & Sons, United States. Booth, L., Aivazian, V., Demirguc-Kunt, V., &
Maksimovic, V. (2001). Capital structures in developing countries. Journal of Finance, 56,
87–130. Bradley, M., Jarell, G. & Kim, H. (1984). On the Existence of an Optimal Capital
Structure.

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