TRENDS IN CAPITAL STRUCTURE: A COMPARATIVE STUDY OF BANKING AND INSURANCE SECTORS IN ETHIOPIA
Understanding the trends in corporate capital structure is critically important to grasp the financing behavior and existing problems of companies in different industries and optimize industry capital structure. This study empirically examined the trends in the capital structure of banking and insurance companies and the extent of variation in capital structures between banking and insurance sectors in Ethiopia. The study used secondary data derived from published annual financial reports of 16 banks and 16 insurers for ten years from 2013-2022. The study employed the book value of the debt-equity ratio as the primary variable and trend ratio analysis and independent samples t-test techniques for analyzing capital structure trends and variations. The research confirmed that Ethiopian banks rely heavily on debt finance, possibly due to their peculiar nature, increased public confidence in banking, and the absence of a regulated secondary stock market in the country. Nevertheless, insurance companies exhibit a lower average debt-equity ratio than the standard norm of 2:1 due to insurers’ strong internal equity-generating capability, solid regulatory performance in the insurance sector, and availability of equity funding from sister banks. The analysis also discovered a statistically significant difference in the capital structures between Ethiopia’s banking and insurance sectors.
Trends, Capital Structure, Banking Sector, Insurance Sector, Debt-Equity