Professional Documents
Culture Documents
August, 2022
Addis Ababa
Table of Contents
Acronyms.............................................................................................................................................3
Abstract................................................................................................................................................4
CHAPTER ONE.......................................................................................................................................5
1.1 Background of the Study.................................................................................................................5
1.2 Statement of the Problem...............................................................................................................6
1.3 Objectives of the Study...................................................................................................................7
1.4 Research Hypothesis.......................................................................................................................7
1.5 Significance of the Study.................................................................................................................8
1.6 Delimitation and Limitation of the Study.........................................................................................8
1.7 Organization of the Study................................................................................................................8
CHAPTER TWO....................................................................................................................................10
2.1 Literature Review..........................................................................................................................10
2
Acronyms
EPS Earning Per Share
3
Abstract
One of the most important strategic financial decisions of firms is the choice of capital structure. A
number of studies have been conducted by numerous researchers both in developed and developing
countries such as Ethiopia to ascertain the empirical relationship existing between capital structure
and firm performance with varying samples and period as well as application of several and
divergent statistical estimation. This study focuses on identifying the impact of capital structure on
firms’ performance in the case of selected private commercial banks in Ethiopia. The research will
be an explanatory research. In this regard, secondary data will be collected from annual reports of
the private commercial banks. In order to meet the objectives of the study a quantitative panel data
methodology will be employed. The study will use the dependent variables Return on Equity (ROE),
Return on Assets (ROA) and Earnings Per Share (EPS) and the independent variables consisting of
long-term debt, short-term debt, total debt, firm size, and firm’s growth. For the purpose of the
study, 10 out of the 19 private commercial banks in Ethiopia will be selected using purposive
sampling technique. The panel data is to be collected from the audited financial statements of the
selected private commercial banks in Ethiopia for the period of 10 years (2009/10 to 2019/20). The
collected panel data will be analysed using descriptive statistics, correlations, multiple linear
regression analysis and inferential statistics by utilizing STATA Software.
4
CHAPTER ONE
1.1 Background of the Study
The capital structure decision is one of the most important decisions made by financial
managers. One of the many objectives of a corporate financial manager is to ensure low cost
of capital and thus maximize the wealth of shareholders. Hence, capital structure is one of
the effective tools of management to manage the cost of capital.
The last number of decades has seen a continuous development of new theories and
empirical findings on the determinants of capital structure of a firm to maximize its value.
These theories suggest that firms select capital structure depending on attributes that
determine the various costs and benefits associated with debt and equity financing. How
capital structure affects companies’ profitability has been a well investigated subject and
been frequently debated since 1958 when Franco Modigliani and Merton Miller published
the “Modigliani-Miller Theorem”. Modigliani and Miller (1958), model argued on the
Irrelevance of the capital structure in determining firms’ value and future performance
Capital structure is the mixture of debt and equity maintained by the firm which refers to the
specific mixture of long term debt and equity the firm uses to finance its operation (Ross
et.al, 2002). Capital structure denotes the mode of finance, usually a blend of the debt and
equity capital, through which a firm is financed. It has been an interesting issue for many
researchers, wherein they attempted to delineate the connection between capital structure
and the performance of firms. The decision of how a firm will be financed is subject to both
the managers of the firms and fund providers. If financing is done by employing an
incorrect combination of debt and equity, a negative effect is seen in the performance of a
firm. Thus, in order to maximize the firm value and performance, managers need to
carefully consider the capital structure decision, which is a complex task, as the use of
leverage varies from one firm to another. Therefore, what managers usually do is try to
achieve the best combination of debt and equity in their capital structure (Nur et.al, 2017).
Many researchers have studied the relationship between capital structure and firms’
financial performance in different perspectives and environments. However, the results
found by the researchers were mixed i.e. capital structure can affect the firms’ performance
positively, negatively or even may have no effect at all. Moreover, majority of prior studies
were done in developed countries with developed secondary market focusing on listed
companies. Hence, there isn’t a specific result which can be generalized on the extent of
relationship between capital structure and firm performance. So there is a constant need for
5
new research in different context to achieve a more complete understanding of the dynamics
of the capital structure and firm performance.
Hence, this study will try to provide further evidence and re-examine the effects of capital
structure on the performance of firms’ in Ethiopia by focusing on private commercial banks
in the Country.
6
Based on the discussion made in the above paragraphs on the findings of empirical literature
and their focus area of study, it is clear that investigation on the effects of capital structure
and profitability is still inconclusive and requires further empirical works which is the gap
observed by the researchers of this study.
To achieve the objectives of this study the following hypotheses will be tested.
H1: There is no significant relationship between capital structure proxied by Total Debt to
Asset and profitability of Private Commercial Banks.
H2: There is no significant relationship between capital structure proxied by Long Term
Debt to Asset and profitability of Private Commercial Banks.
H3: There is no significant relationship between Short Term Debit to Asset and profitability
of Private Commercial Banks.
H4: There is no significant relationship between asset size and profitability of Private
Commercial Banks.
H5: There is no significant relationship between growth and profitability of Private
Commercial Banks.
7
1.5 Significance of the Study
The study will deal with the effect of capital structure on the performance of private
commercial banks in Ethiopia which is beneficial for different stakeholders. It will be
beneficial to Management bodies/Board of Directors as it will help them to understand how
to decide optimal capital structure to attain profit maximization goal of bank, as well as to
determine their optimal level of capital structure to achieve maximum level of firm’s value
and profitability with a minimal cost of capital. The study will also be instrumental for
Government bodies or policy makers such as NBE. Investors who seek to invest in a firm
which has maximum profitability with minimized risk can also benefit from the study as it
will provide alternative opportunities to decide where to invest more by protecting their
investment. The study could also be used as a reference material for other researchers in the
area of corporate finance/capital structure and profitability in the future.
8
on capital structure and profitability. Chapter three will present in detail a discussion and
explanation of the research methodology. Then Chapter four will present the results and
discussion of the study. Finally, chapter five will present the conclusions and possible
recommendations.
9
CHAPTER TWO
2.1 Literature Review
This chapter presents the literature concerning capital structure and performance of firm.
The discussion on capital structure is made by utilizing the most prominent theories;
starting from the Modigliani and Miller (1958) irrelevance theory of capital structure up to
the different alternative theories; static trade off theory, pecking order theory and agency
theory in order to provide the theoretical bases for this thesis. Following the theoretical
literature, the review of empirical studies from the research of different countries by
focusing on capital structure and performance of the firms are presented and in line with
these knowledge gap from the existing literature will be discussed.
Capital structure has been defined by many researchers and scholar. Even though it is
defined by many authors the definitions are explicit and have the same meaning.
Accordingly, Luper and Isaac.M (2012) defined capital structure as the method in which a
company finance its activity through equity, debt or hybrid security and that a firm's capital
structure is then the composition or structure in its liabilities.
The objective of capital structure is maximization of firm value by minimizing the overall
cost of capital. A firm pays a fixed cost or fixed return such as debt, equity and preference
share capital if it uses the fixed cost of financing. When companies mobilize funds from
long term finance such as equity and debt the organization required fixed cost of capital. For
this matter the company must take careful steps when deciding the capital structure of the
firm to reduce cost of capital.
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theories which explain the capital structure of the firm include the static trade off theory,
pecking order theory and agency theory.
2.1.1.1 Modigliani and Miller MM Theory
The pioneering work on capital structure theory emanates from Modigliani and Miller
(1958). That theory provides the groundwork from which much other thinking later
developed. Based on an arbitrage argument, Modigliani & Miller (1958) ascertained
that with the existence of perfect capital market, the capital structure decisions would
have no impact on the value of the firm.
The important assumption they set in their theories include; there is a perfect capital
market, there are no retained earnings, there are no corporate taxes, the investors act
rationally, the dividend payout ratio is 100% and the business consists of the same level
of business risk. According to Luigi and Sorin (2009) there are two fundamentally
different types of capital structure irrelevance propositions. The classic arbitrage-based
irrelevance propositions provide settings in which arbitrage by investors keeps leverage
does not affect the value of the firm. According to Miller and Modigliani (1961) as
cited in Luigi and Sorin (2009) the second irrelevance proposition concludes that, the
capital structure policies followed by the firm which consist of investment policy and
the dividend payout policy does not affect the current price of it is shares and also the
total return received by the shareholders of the firm. It means that in perfectly
competitive market, the mix of debt equity ratio or the capital structure of the firm does
not matter. However, in their seminal paper MM (1963), they demonstrate that with the
existence of corporate tax the value of levered firm is greater than the value of
unlevered firm. There are a lot of study made in order to disprove the irrelevance
theorem of Modigliani and Miller. The assumption of Modigliani and Miller (1958)
does not work under different of circumstances. Luigi and Sorin (2009) state that, the
most commonly used elements that make the assumptions invalid include concern for
tax, transaction and bankruptcy costs, agency conflicts, adverse selection, lack of
distinction between financing and operations, opportunities received at different time,
and investor clientele effects. In addition to this market imperfection, dividend policy
and variety in risk are those condition that the theory fails to work.
A firm’s capital structure which is composed of debt and equity has proven to have an
influence over performance.
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2.1.1.2 Static Trade Off Theory
Trade-off theory claimed that a firm’s optimal debt ratio is determined by a trade-off
between the bankruptcy cost and tax advantage of borrowing, holding the firm’s assets
and investment plans constant (Myers, 1984). The goal is to maximize the firm value
for that reason debt and equity are used as substitutes. According to this theory, higher
profitability decreases the expected costs of distress and let firms increase their tax
benefits by raising leverage; therefore, firms should prefer debt financing because of the
tax benefit. As per this theory firms can borrow up to the point where the tax benefit
from an extra dollar in debt is exactly equal to the cost that comes from the increased
probability of financial distress (Ross et.al, 2002).
In addition to financial distress cost, agency costs also consists of the use of debt and equity
ratio. Agency costs arise due to conflict of interest among management, shareholders
and debt holders. Consequently, the costs are incurred associated with monitoring
management's actions to ensure that these actions are consistent with contractual
agreements among the management body, equity holders and debt holders. Shibru
(2012), state that firms are benefited if they absorb high debt than equity as a source of
finance, if they have more tangible asset and taxable income. While the firm depends on
equity financing if the firm is dominated by intangible asset that the value disappears at
the time of liquidation. In terms of profitability, if the firm has more capacity to utilize
debt and absorb tax shield on taxable income the firm is predicted as a profitable firm.
So, the theory suggests that until the financial distress cost become significant the firm
would prefer debt over equity.
In general, according to trade-off theory firms that are more profitable should borrow more
in order to generate the tax shield benefit. Thus, the firm should operate with higher
leverage by considering the cost of financial distress and agency cost. There are studies
that provide empirical evidence supporting this hypostasis; that is, there is a positive
relationship between debt level and firm's performance (Abor, 2005).
2.1.1.3 Pecking Order Theory
The other alternative theory that explain the firm debt position is the result of past
investment and capital decision of the firm is pecking order theory which is described
by Myers (1984) and Myers and Majluf (1984). The pecking order theory declares that
there is no well-defined target capital structure. This theory argues that, to minimize the
problem of information asymmetry between the firm's managers-insiders and the
outsider's shareholders firms may follow some financing hierarchy.
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Managers with positive expectations about the future, whose stocks are undervalued, will
opt for debt rather than equity since they believe their company is worth more than the
current value. Hence, by issuing debt, firms will use the excess free cash flow to settle
interest payments, instead of repurchasing shares which may be costly in case stock
prices appreciate. However, managers may issue equity when they are not able to obtain
more debt even if they believe that their stocks are undervalued (Lemmon & Zender,
2010).
According to Myers (1984), the pecking order theory determined the firm financing
decision by hierarchy of preference. First firms prefer internal source of fund i.e.
retained earnings. Since internally generated funds incur little issuing cost, managers
have a preference for internally generated fund as a way of finance. Therefore, under
pecking order proposition internally generated funds would stand a top of other
alternatives as the first preferred form of financing the firm's undertaking. Nonetheless,
it may not be possible to entirely depend on internally generated funds as is the case
when internal funds fall short of the amount of finance required to undertake expensive
and profitable projects. If the internal source of fund is not enough then the managers
obligated to look for external source of funds. However, there is no single source of
external finance. Under pecking order theory, the firm prefers to issue debt in first
phase among alternative source of external finance. For one thing, as per the principle
of financing "choose the safest path first", debt financing indeed is the safer of the other
sources of external finance. Hence, debt financing is presumed to be the second best
source of finance next to internally generated funds. In this way, the menu of financing
source will be picked up in accordance with their rank on safety and cost of issue.
Accordingly, the safest source of debt financing is followed by the hybrid securities
such as convertible bond. Ultimately, in case debt financing is also inadequate to
finance planned projects, then managers would have no choice but accept equity
financing, and thereby incurring the high issue costs and dilution of ownership that
come with equity financing (Myers 1984). As a final option, assets are financed by
equity capital, but only if there is no other alternative. So, the firm will choose different
sources of finance in such a way to minimize additional cost of asymmetric
information. According to Myers and Majluf (1984), when the manager of the firm
issue equity instead of debt, the stock price of the firm is discounted by the outside
investor. Due to this it is important to keep away from equity financing in order to
avoid this discount.
13
Thus, this theory suggests that profitable firms, firms with significant amount of
retained earnings, tend to maintain low level of debt in their capital structure. Myers &
Majluf (1984) and Myers (1984) consider the asymmetric information to observe the
pecking order theory under which leverage increases with the extent of information
asymmetry.
Agency theory initiated by Jensen & Meckling (1976) suggests that agency costs arise
from the conflict of interest between debt-holders and equity-holders. Commonly,
managers, being part of the owners, tend to collaborate with equity-holders, thus if the
firm is approaching financial distress, equity-holders may encourage managers to pass
decisions, which, in effect, extract wealth from debt-holders to equity-holders (Buferna
et.al, 2005). If managers pass the decision to invest the raised fund in the risky
investment in an intention to extract wealth from debtholders, then the conflict of
interest arises. According to (Myers, 1984), if the investment is successful, the benefits
are enjoyed solely by equity-holders, i.e., debt-holders receive only the fixed interest on
the capital they invested. In contrast, if the investment fails, the firm may default on
debt, and then debt-holders suffer a lot since they cannot look beyond the assets of the
corporation for satisfaction of their claims. This is because the liability is limited to the
corporation.
The principal has to control this problem by fixing an appropriate level of incentive for
the agent and to monitor the agent's action by incurring monitoring costs. The principal
incurs a specific cost, the "agency cost", which can be explained as the sum of the
following activities: (1) the amount incurred by the principal as monitoring expenditure,
(2) the amount incurred by the agent as bonding expenditures, and (3) the residual loss
arising out of agency relationship. The principal incurs monitoring costs to limit the
unexpected activities of the agent (Jansen and Meckling, 1976). The use of debt may
mitigate the agency problem and serve as a mechanism to discipline the manager from
engaging in self-serving activities. Therefore, the amount of free cash flow could be
diverted by the manager is reduced by assuming more debt. According to Siddiqui and
Shoaib (2010), in the free market economy reducing agency cost is one of the essential
goals of the business organization by achieving optimal capital structure. According to
them attaining to the optimal capital structure by reducing agency cost is one of
performance measures tool for all business organization including banks.
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2.1.1.5 Optimum capital structure
15
especially in finance is not an easy task this is due to the multidimensional measure of
performance. According to Zeitun and Tian (2007), performance of the firms is
measured by either financial or organizational variables. From the variables which are
used to measure the financial performance of the firm profit maximization, maximizing
profit on asset and maximizing shareholders benefits is the most important measure of
firm's effectiveness whereas growth in sales and growth in market share are some of the
variables used to measure the operational performance of the firm. Mangers look for the
profit generation ability, but it is subject to agency cost i.e. principal- agent
consideration.
In this section empirical studies that have been conducted with respect to the effect of
capital structure on performance of firms are reviewed.
Amponsah et.al., (2013) investigated the relationship between capital structure and
profitability of listed firms in Ghana during the five-year period from 2005 to 2009. They
described the relationship between the firms’ profitability and capital structure based on the
ideas from different literatures showed that there is either a positive, negative or neutral
relationship between profitability and capital structure. They also indicated that there is no
conclusive evidence of what should be the optimal capital. Regression analysis was used to
investigate the relationship between capital structure and profitability. The authors used,
average profitability and debt ratios to determine whether Ghanaian listed firms depended
on debt or not. Similar to (Abor, 2005) study, the results of (Amponsah et.al., 2013) also
revealed that, there is a statistically significant positive relationship between profitability
and short term debt and a significantly negative relationship between profitability and long
term debt. However, the results revealed a statistically negative relationship between
profitability and total debt contrary to (Abor, 2005) study. The results also revealed that,
Ghanaian listed firms relied more on short term debt than long term debt. The average short
term debt to total capital ratio was 52% and long-term debt to total capital ratio was 11%.
The study made by Zeitun and Tian (2007) is aimed at examining the effect of capital
structure on corporate performance of companies in Jordan. The data for the study were
collected from the financial statement of 167 Jordanian companies in Amman stock
exchange (ASE) for the period 1989-2003. In the study they measure performance by using
Tobin's Q, market value of equity to the book value of equity, price per share to the earnings
per share, and market value of equity and book value of liabilities divided by book value of
equity as a market measure whereas ROE, ROA and earnings before interest and tax plus
depreciation to total asset as accounting measures. The independent variables are measured
16
by; leverage, growth, size, standard deviation of cash flow, tax and tangibility. Finally, they
conclude that performance of the companies which is measure by accounting and market
measures significantly and negatively affected by the capital structure of the firm in Jordan.
Salim & Yadav (2012) examined the relationship between capital structure and firm
performance. The investigation was performed using panel data procedure for a sample of
237 Malaysian listed companies on the Bursa Malaysia Stock exchange during 1995-2011.
The study used four performance measures (including return on equity (ROE), return on
asset (ROA), Tobin’s Q and earning per share (EPS) as dependent variable. The five capital
structure measure (including long term debt, short term debt, total debt ratios and growth) as
independent variable. Size is a control variable. The data are divided into six sectors which
are construction, consumer product, industrial product, plantation, property, trading and
service. The empirical tests indicate that capital structure (especially Total Debt and Short
Term Debt) negatively impacts performance measured by ROE. On the otherhand, capital
structure (Long Term Debt and Total Debt) has negative significant impact on firm’s
performance measured by ROA. Furthermore, findings of this study suggest that there is a
significantly positive relationship between Tobin’s Q (firm performance) and capital
structure measured by Long Term Debt and Short Term Debt.
The major objective of the study made by Pratheepkanth (2011) is to identify the impact of
Capital Structure on financial Performance of the company in Sri Lanka. The data for the
study were taken from the financial statements of business organization listed on Colombo
Stock Exchange for the period of 2005-2009.In his study the researcher measure capital
structure by debt equity ratio while the variables used as financial performance
measurement are Gross profit, Net profit, return on investment and ROA. The analysis of
the study shows that the relationship between capital structure and gross profit is a weak
positive whereas -there is a weak negative relationship between capital structure and net
profit, return on investment and return on equity. From the analysis the researcher concludes
that the relationship between capital structure and performance of the company in Sri Lanka
is negative.
Using unbalanced panel data from all non-financial listed firms during the period 2007–
2012 Phuong and Bich (2017) investigated the effect of capital structure on firms’
performance in Vietnam. The results indicated that all debt ratios: long term to total asset,
short term debt to total asset and total debt to total have significantly negative relation to
firm performance which was measured by ROA, ROE and Tobin's Q. This outcome is not in
accordance with most studies conducted in developed countries, which hypothesize a
positive relationship between capital structure and firm performance; however, it is
17
consistent with some studies in the context of developing markets. The study argued that in
typical developing market like Vietnam, the benefits of debt from tax saving may be less
than financial distress cost. In addition, the monitoring role of debt is not substantial
because of severe information asymmetry and under-developed financial system.
Multiple regression models were used to evaluate the relationship between capital structure
and banking performance in Pakistan by (Mujahid et.al, 2014). Performance is measured by
return on assets, return on equity and earnings per share. Determinants of capital structure
contains long term debt to capital ratio, short term debt to capital ratio and total debt to
capital ratio. Results of the study validated a positive relationship between factors of capital
structure and performance of banking industry.
Decisions on capital structure was one of the hardest and most challenging issues facing
banks, but also is the most vital decision for their continued survival (Zaroki et.al, 2015).
They investigated the relationship between capital structure on the banks performance of the
listed banks in Tehran Stock Exchange for the 2008 to 2013 period. Three indicators of
return on assets, return on equity and earnings per share as measures of bank performance.
The results of estimating the model with fixed effects method implies that the capital
structure has a positive impact on earnings per share and has a negative effect on return on
assets, but no significant effect on return on equity. Also, bank size has a significant and
positive effect on all three performance criteria and also asset growth has a significant and
positive effect only on return on equity.
Usman (2013) examined the determinants of capital structure of large taxpayer share
companies in Ethiopia. Econometric analysis was performed for a panel of 37 listed
companies in Ethiopian Revenue and Customs Authority (ERCA) large taxpayers’ branch
office in Addis Ababa for the study period of 2006–2010. Nine conventional explanatory
variables were adopted in the study, including profitability, size, age, tangibility, liquidity,
non-debt tax shield, growth, and dividend payout ratio and earnings volatility. As a result of
the improvement in the existing estimation methods that enables to employ cross-sectional
and time-series data concurrently, random-effect panel data regression was applied to study
the effect of selected independent variables on capital structure. The result showed that size,
age, tangibility, liquidity position and non-debt tax shield of a company are positively
correlated with leverage, whereas profitability, earnings volatility and dividend payout ratio
are negatively associated with leverage. Growth variable was found to be statistically
insignificant in affecting leverage of large taxpayer share companies in Ethiopia. Based on
the sign of these relations the Author also indicated that, Agency cost theory provide more
18
convincing evidence than other capital structure theories in elucidating the capital structure
of large taxpayer share companies in Ethiopia.
Muhammed et.al., (2015) examined the relationship between capital structure and
performance of commercial banks in Ethiopia. The investigation was based on panel data
(from the year 2000-2012) collected from the annual reports of eight sample commercial
banks in the country. This study established a model to measure the association between
capital structure which is proximate by total debt to total asset and total debt to total capital
and performance which is measured by return on asset (ROA), return on equity (ROE) and
net profit margin (NPM). The results of regression analyses indicated that on average
leverage has a positive effect on the financial performance of commercial banks in Ethiopia
when performance measured by return on equity. In contrast, the similar analyses indicate
that leverage has a significant negative effect on performance of commercial banks in
Ethiopia when performance is measured by return on asset and net profit margin.
According to Mathewos (2016) the impact of capital structure on financial performance of
selected commercial banks in Ethiopia over five (5) year period from 2011 to 2015 using
secondary data collected from financial statements of the commercial banks. Data was also
analyzed on quantitative approach using multiple regression models. The study used two
accounting-based measures of financial performance (i.e. return on equity (ROE) and return
on assets (ROA) as dependent variable and five capital structure measures (including debt
ratio, debt to equity ratio, loan to deposit, bank’s size and asset tangibility) as independent
variable. The results indicated that financial performance, which is measured by both ROA
and ROE, is significantly and negatively associated with capital structure proxies such as
Debt to Equity Ratio, SIZE and Tangibility whereas Debt Ratio has positive and significant
relationship with ROA and ROE.
Amdemichael (2012) studied factors affecting bank profitability for a total of eight
commercial banks in Ethiopia, covering the period of 2000-2011. The study adopted a
mixed methods research approach by combining documentary analysis and in-depth
interviews. 19 The findings of the study showed that capital strength, income
diversification, bank size and gross domestic product have statistically significant and
positive relationship with banks’ profitability. On the other hand, variables like operational
efficiency and asset quality have a negative and statistically significant relationship with
banks’ profitability. However, the relationship for liquidity risk, concentration and inflation
is found to be statistically insignificant
19
In summary, the empirical review of the literature shows that, there is no universally
acceptable theory of capital structure. Also, there is no conclusive result on the relationship
between capital structure and performance of the firm. By having the discrepancy, this study
is conducted in the Ethiopian banking industry to examine the relationship between capital
structure and performance of private commercial banks by using selected capital structure
and performance measure variables.
The purpose of this paper is to examine the relationship between capital structure choices
and firm performance. Based on the theoretical concepts and empirical studies stated above
as well as to meet the objectives of the study and taking in to account the environment in
which banks operate, the following variables are selected and presented in the conceptual
framework developed as follows:
The purpose of this paper is to examine the relationship between capital structure choices
and firm performance. The independent variables consist of long-term debt, short-term debt,
total debt, firm size, firm’s growth and dependent variables are Return on Equity (ROE),
Return on Asset (ROA) and earnings per share (EPS). Return on assets and return on equity
are accounting measures while earning per share is market measure of performance.
Formulas for measuring all variables are given in table 1 below;
20
Table 1: Variables Description
21
CHAPTER THREE
3.1 Research Methodology
This chapter describes the research procedure that is to be followed to carry out this
study. It consists of five sections. The first section is research design followed by the
section two which is the research approach. In the third section, population and sample
selection methods are presented. The fourth section is the data collection methods and
instruments. The final section presents and discusses method of data analysis to be
pursued.
22
3.1.3 Population and Sampling
According to the NBE Second Quarter report for 2021/22F.Y., the number of Banks
operating in Ethiopia reached 21 including 19 private and 2 state owned Banks.
To assess the impact of capital structure on the performance of private banks in Ethiopia,
quantitative research approach will be employed and panel data will be used to analyze the
resulting estimates so that stated objectives and hypothesis are addressed accordingly.
According to Shikur (2015), a quantitative panel data gives more informative data, more
variability, less linearity among variables, more degrees of freedom and more efficiency. In
addition to this, repeated cross section of observations over a range of years are better suited
to study the dynamics of change, can better detect and measure effects that simply cannot be
observed in pure cross section or pure time series data. The study will consider data for the
period of 10 years for the following 10 private commercial banks selected from a population
of 19 banks, using purposive sampling method i.e. due to their longer number of service
years in the industry and based on availability of annual reports for the period under review:
Awash, Dashen, Wegagen, United, NIB, Abyssinia, Zemen, Oromia International, Coop and
Lion. Hence, the study will employ panel data of the ten commercial banks for ten years
(2010 to 2020) resulting in 100 observations.
23
regression analyses in both spatial (units) and temporal (time) dimensions. The collected
panel data will be analysed using descriptive statistics, correlations, multiple linear
regression analysis and inferential statistics by utilizing STATA Software.
24
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Annex: Time Schedule and Budget
Table 2: Time Schedule
Major Activities Schedule
Topic Selection 1 Jul. 2022
Introduction (Chapter 1) 3 Jul.–9 Jul. 2022
Literature review & theory 9 Jul.– 31 Jul. 2022
(Chapter 2)
Data & Methodology (Chapter 3) 1 Aug.–7 Aug. 2022
Submission of chapter 1, 2 & 3 to 9 Aug.2022
Supervisor
Collation of data & analysis 10 Aug.–10 Sep. 2022
Analysis & Results (chapter 4) 11 Sep.–5 Oct. 2022
Submission of chapter 4 to supervisor 7 Oct. 2022
Discussions & conclusions (chapter 5) 10 Oct.–25 Oct. 2022
Table 3: Budget
Material (Resource) Amount in Birr
Stationary 2,000
Photocopy and Printing 600
Transportation 800
Miscellaneous 500
Sub Total 3,900
Contingency (10%) 390
Total 4,290
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