IDEAS home Printed from https://ideas.repec.org/a/gam/jrisks/v12y2024i4p69-d1378375.html
   My bibliography  Save this article

Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks

Author

Listed:
  • Seid Muhammed

    (Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Godollo, Hungary
    Department of Accounting and Finance, College of Business and Economics, Salale University, Fitche P.O. Box 245, Ethiopia)

  • Goshu Desalegn

    (Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Godollo, Hungary
    Department of Accounting and Finance, Faculty of Business and Economics, Kotobe University of Education, Addis Ababa P.O. Box 5563, Ethiopia)

  • Prihoda Emese

    (Institute of Agricultural and Food Economics, Szent Istvan Campus, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Godollo, Hungary)

Abstract

This study aimed to examine the effects of capital structure on the financial performance of Ethiopian commercial banks. The dependent variable, financial performance, is measured by Return on Assets (ROA), while factors such as loan-to-deposit ratio (LDR), asset-to-total equity ratio (ATER), total deposit-to-total asset ratio (TDTAR), capital adequacy ratio (CAD), and asset growth ratio (GA) were used as proxy independent variables to gauge capital structure. Using a quantitative approach and an explanatory research design, this study analyzes 6 years of audited financial reports from 14 commercial banks in Ethiopia. This investigation employs a random effect regression model and Stata 14 software package to explore the relationships among these variables. The result revealed that both the loan-to-deposit ratio and the total deposit-to-total asset ratio have a positive and significant impact on financial performance, while the asset growth ratio showed a negative effect. Based on these findings, this study recommends that bank authorities concentrate on bolstering their deposit base, managing asset growth efficiently, maintaining adequate capital levels, and optimizing leverage levels to improve financial performance and ensure long-term sustainability in the banking sector. Additionally, this research is anticipated to inform policymakers about regulatory frameworks for banks and assist banking managers in formulating effective capital financing strategies within the Ethiopian commercial banking sector, thus enriching the existing literature on the relationship between capital structure and financial performance.

Suggested Citation

  • Seid Muhammed & Goshu Desalegn & Prihoda Emese, 2024. "Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks," Risks, MDPI, vol. 12(4), pages 1-15, April.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:4:p:69-:d:1378375
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-9091/12/4/69/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-9091/12/4/69/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hariem Abdullah & Turgut Tursoy, 2021. "Capital structure and firm performance: evidence of Germany under IFRS adoption," Review of Managerial Science, Springer, vol. 15(2), pages 379-398, February.
    2. Julius B. Adesina & Barine M. Nwidobie & Oluwatosin O. Adesina, 2015. "Capital Structure and Financial Performance in Nigeria," International Journal of Business and Social Research, LAR Center Press, vol. 5(2), pages 21-31, February.
    3. Jaroslav Mazanec, 2023. "Capital Structure and Corporate Performance: An Empirical Analysis from Central Europe," Mathematics, MDPI, vol. 11(9), pages 1-19, April.
    4. Thi Hien Nguyen, 2020. "Impact of Bank Capital Adequacy on Bank Profitability under Basel II Accord: Evidence from Vietnam," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 45(1), pages 31-46, March.
    5. Julius B. Adesina & Barine M. Nwidobie & Oluwatosin O. Adesina, 2015. "Capital Structure and Financial Performance in Nigeria," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 5(2), pages 21-31, February.
    6. Shirwan Rafiq Sdiq & Hariem A. Abdullah, 2022. "Examining the effect of agency cost on capital structure-financial performance nexus: empirical evidence for emerging market," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2148364-214, December.
    7. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    8. Seid Muhammed & Goshu Desalegn & Maria Fekete-Farkas & Emese Bruder, 2023. "Credit Risk Determinants in Selected Ethiopian Commercial Banks: A Panel Data Analysis," JRFM, MDPI, vol. 16(9), pages 1-14, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Obumneme Renato Anozie & Taiwo Adewale Muritala & Victor Edet Ininm & Nurudeen Salako Yisau, 2023. "Impact of capital structure on financial performance of oil and gas firms in Nigeria," Future Business Journal, Springer, vol. 9(1), pages 1-9, December.
    2. Usman Suleiman & Abiodun Popoola, PhD & Adabenege Onipe Yahaya, PhD, 2022. "Equity Financing and Financial performance of Listed Deposit Money Banks in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(12), pages 619-624, December.
    3. Paseda, Oluseun & Obademi, Olalekan, 2020. "Macroeconomic variables and their effects on the capital structure of quoted Nigerian firms," MPRA Paper 117060, University Library of Munich, Germany, revised 31 Jan 2020.
    4. Adepoju Adeoba Asaolu, 2021. "Capital Structure and Firm Performance: A comparative Study of Oil & Gas and Manufacturing Sectors in the United States of America," Business and Management Studies, Redfame publishing, vol. 7(1), pages 29-44, March.
    5. Job Boahen, 2022. "Capital Structure Decisions Nexus on Listed Non-Financial Institutions’ Performance in Ghana," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(02), pages 82-88, February.
    6. Feras Izzat Kasasbeh, 2021. "Impact of financing decisions ratios on firm accounting-based performance: evidence from Jordan listed companies," Future Business Journal, Springer, vol. 7(1), pages 1-10, December.
    7. James Obilikwu, 2018. "The Imact of Capital, Concentration, Size and Liquidity on Banking Industry Performance in Nigeria," International Journal of Economics and Financial Issues, Econjournals, vol. 8(4), pages 54-60.
    8. Anh-Huyen Vu Thi & The-Dong Phung, 2021. "Capital Structure, Working Capital, and Governance Quality Affect the Financial Performance of Small and Medium Enterprises in Taiwan," JRFM, MDPI, vol. 14(8), pages 1-13, August.
    9. Hwerien Rosemary Idamoyibo, 2024. "Financial Structure and Corporate Profitability of Firms in Nigeria: Does Firm Age Act as a Moderator?," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(7), pages 2259-2271, July.
    10. Evans Akomeah & Paula Bentil & Alhassan Musah, 2018. "The Impact of Capital Structure Decisions on Firm Performance: The Case of Listed Non-Financial Institutions in Ghana," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(4), pages 1-15, October.
    11. Lukman Adebayo Oke & Daud Omotosho Saheed & Yusuf Olamilekan Quadri, 2019. "An Empirical Analysis Of Corporate Capital Structure And Financial Performance Of Listed Conglomerates In Nigeria," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 8(3), pages 95-114.
    12. Yu, Huaibing, 2024. "Why isn't composite equity issuance favored by the stock market? A risk-based explanation for the anomaly," International Review of Financial Analysis, Elsevier, vol. 94(C).
    13. Hawkar Anwer Hamad & Kemal Cek, 2023. "The Moderating Effects of Corporate Social Responsibility on Corporate Financial Performance: Evidence from OECD Countries," Sustainability, MDPI, vol. 15(11), pages 1-20, May.
    14. M N, Nikhil & S Shenoy, Sandeep & Chakraborty, Suman & B M, Lithin, 2023. "Does the Ind AS moderate the relationship between capital structure and firm performance?," MPRA Paper 119541, University Library of Munich, Germany, revised 15 Oct 2023.
    15. Chei Bukari & Emm anuel Atta Anaman, 2021. "Corruption and firm innovation: a grease or sand in the wheels of commerce? Evidence from lower-middle and upper-middle income economies," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 11(2), pages 267-302, June.
    16. Raden Roro Widya Ningtyas Soeprajitno & Sri Ningsih & Iman Harymawan & Bablu Kumar Dhar & Suham Cahyono, 2023. "The School-ties Between Top Management Executive and Audit Partner: Exploring From Earnings Management in Indonesia," SAGE Open, , vol. 13(4), pages 21582440231, December.
    17. M N, Nikhil & S Shenoy, Sandeep & Chakraborty, Suman & B M, Lithin, 2023. "Is the Nexus Between Capital Structure and Firm Performance Asymmetric? An Emerging Market Perspective," MPRA Paper 119669, University Library of Munich, Germany, revised 17 Nov 2023.
    18. Amanj Mohamed Ahmed & Nabard Abdallah Sharif & Muhammad Nawzad Ali & István Hágen, 2023. "Effect of Firm Size on the Association between Capital Structure and Profitability," Sustainability, MDPI, vol. 15(14), pages 1-17, July.
    19. Timothy Olaniyi Aluko & Innocent Bayai, 2023. "This study tests the interaction effect of government financial support for small businesses in the relationship between business revenue and the grant-approved amount in the post-financial support sc," Eurasian Journal of Business and Management, Eurasian Publications, vol. 11(1), pages 46-57.
    20. Ana María Iregui-Bohórquez & Ligia Alba Melo-Becerra & Antonio José Orozco-Gallo, 2020. "Corporate taxes and firms' performance: A meta-frontier approach," Borradores de Economia 1116, Banco de la Republica de Colombia.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jrisks:v:12:y:2024:i:4:p:69-:d:1378375. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.