Capital Structure and Financial Performance of Insurance Industries in Ethiopia

Abstract

An appropriate capital structure is a critical decision for any business organization to be taken by business organization for maximization of shareholders wealth and sustained growth. Thus, the major focus of this study is to investigate empirically firm specific factors such as, firm leverage, growth opportunities, size, risk, tangibility and liquidity were impacts on performance in Ethiopian insurance companies from 2004-2013 annual reports. The results show that firm leverage, Size, tangibility and business risk are significant impact on performance of insurance companies in Ethiopia. While firm growth and liquidity are not clear and statistical proved relationship are obtained from the regression analysis. The results provide strong evidence in support of the pecking order theory of capital structure which asserts that leverage is a significant determinant of firms#x2019; performance. A significant negative relationship is established between leverage and performance. From the findings the researcher recommended that the sample of insurance companies in Ethiopia use more equity than debt in financing their business activities, this because if the value of business can be enhanced with debt capital, it is dangerous for the firm.