Determinants Of Capital Structure Decision Of Ethioipan Insurance Company

Abstract

Determinants of capital structure decision of Ethiopian insurance companies have been considered to be an important issue on Ethiopian insurance companies. This study is, therefore, aimed to investigate the determinants of the capital structure decision of insurance company in Ethiopia using balanced panel data from eleven insurance companies for the period covering from 2010 to 2020. To find out what determines capital structure, six explanatory variables (Tangibility, age, size, liquidity, GDP and inflation) was selected and regressed beside the suitable capital structure measure is leverage. A quantitative approach and explanatory design were employed to realize the stated objectives. To achieve the study objectives, secondary data were collected from annual financial statements of sampled insurance companies for the stated period and analyzed using descriptive statistics and a random effect (RE) regression model. The random effect regression result shows that age, firm size, inflation, and real GDP are identified as most important determinants of leverage hence and are significant and positively related. However, liquidity and tangibility are not significantly related with leverage. The researcher concluded that the firm’s specific variable, firm’s size, age, GDP and inflation are significant and have positive relationship to determining optimum capital structure of Ethiopian insurance Companies.Given the positive relationship between firm size and leverage, insurance companies should prioritize robust risk management strategies to mitigate the potential risks associated with increased external financing. This includes maintaining sufficient liquidity buffers and diversifying investment portfolios to navigate uncertain economic conditions effectively by analyze potential future cash flow demands including claims payouts, policyholder surrenders, operating expenses, and debt obligations and develop an investment strategy with a diversified asset allocation across different asset classes (e.g., equities, bonds, real estate, alternative investments). This reduces dependence on any single asset class for returns and mitigates risk