The present systematic literature review aims to analyze the literature on factors affecting capital structure decisions of commercial banks of Ethiopia to identify the existing gaps and the level of existing research in the field and to provide direction for future research. The review was conducted using 11 relevant and available scholarly studies that were published in any time period mainly using access open search engines and databases because of shortage of studies on the specified review and lack of access to the known database. Different key words were used to identify the articles. The Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) framework was employed to analyze the research work on capital structure decisions. The inclusion and exclusion criteria were specified in the review protocol. The descriptive analysis was performed based on different parameters to arrive at conclusions. A citation analysis was also performed to recognize impactful authors and papers. The findings revealed that most of the variables of interests explored in the studies were contradicting each other and the previous literature variables. The capital structure research studies were conducted by considering few variables and most of the studies were not cited. The findings regarding to the theories supported with factors affecting capital structure decision of commercial banks of Ethiopia was contradicting each other and not justified. The banking literature still doesn't cover the capital structure of banks very much. There is currently a lack of clarity regarding how banks determine their capital structure and what variables affect their corporate financing behavior. Therefore, it is recommended that the concerned body conduct an in-depth study of the decisions banks make about their capital structure by identifying pertinent elements.
Systematic Review
Factors Affecting Capital structure decisions of banks: A Systematic Review Evidence from Commercial banks of Ethiopia
https://doi.org/10.21203/rs.3.rs-2757956/v1
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The concept of capital structure determination is not an easy subject as it determines the optimal capital structure of an organization. It remains as a controversial issue in modern corporate finance. A firm can raise fund either through debt or equity or mixture of both (M.Sangeetha & N.Sivathaasan, 2013; Faris AL- Shubiri, 2002). Capital structure is the combination of financing forms such as retained earnings, long-term debt, and equity used by a firm to finance its overall operations and assets. Capital structure has a bearing on the value of both large and small firms (Satish Kumar & Riya Sureka & Sisira Colombage, 2019; Bhaduri S.N., 2002).
A company's capital structure represents how the company raises the capital it needs to establish and expand its business. It is a combination of different types of equity and debt that a company holds for its funding decisions. Most efforts in the financial decision making process focus on determining the optimal capital structure. Firm’s value is maximized and capital costs are minimized. Similarly, Md Jamil Sharif & Tanin Muhammad also states that Capital structure is considered as one of the most important factors for an organization because it can affect the financial position of the company and the stakeholders’ value. As the organizations try to maximize their benefits or profits, the managers are expected to choose the optimal level of debt and equity (Md Jamil Sharif & Tanin Muhammad, 2019).
A number of studies have explored and explained the choice of firm's capital structure both theoretically and empirically. To understand the problem of determining capital structure, it is essential to begin with MM's first theory of Capital Structure in 1958. Modigliani and Miller (1958) originally argued that in a perfect capital market, a firm's value is completely independent of its capital structure. Debt and equity financing are therefore perfect substitutes for each other (Modigliani F Miller MH., 1958). Modigliani and Miller later found that the existence of taxes and information asymmetries lead to the choice of capital structure and greatly influence the value of firms. Therefore, the choice of capital structure raises or lowers the value of a company. The right choices build an optimal capital structure that maximizes its value (Modigliani F Miller MH, 1963) .
The foundation for theories and research focus on the subject of capital structure began with the introduction of Modigliani and Miller’s (M&M) theoretical model about corporate capital structure in 1958 which is considered to have created the turning point for modern corporate finance theory.
In the dynamic and competitive world, the capital structure decision plays a crucial role in day to-day business performance and operations. The issue is still debatable for practitioners and academicians. After the MM theory, to explain the optimum capital structure, a number of theories have developed, such as static trade-off theory, Agency cost theory, pecking order theory, traditional approach, net income approach, and net operating approach. Though a lot of theories were developed following MM theory developing countries face challenges concerning the capital structure issues.
The accessibility and proper implementation of the capital market and financial segments has a strong political, socioeconomic contribution, in addition to the backbone of economic growth, national development, and poverty reduction. However, in the absence of appropriate capital market drag the economic development backward and unable to optimize the capital structure of firms. In Ethiopia the financial sector is dominated by the public, this means the share capital is not free to international investors as privatization. Bases for preference of financial source alternatives of firms are limited in countries suffering due to an absence of a secondary market to raise funds for expansion of new as well as existed companies. Different firms may use various sources of finances options; the same is true on factors affecting capital structure of commercial banks in Ethiopia (Hayleslasie Tsegay Aregawi & B. Chandra Mohan Patnaik, 2018).
The capital structure decision is at the center of many other decisions in the area of corporate finance. 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. As a result, studying the determinants of capital structure should help companies make the optimal choice between debt and equity to achieve maximum enterprise value.
In the subject of corporate finance, theories developed by academics include the MM theory, trade-off theory, information asymmetry theory, pecking order theories, and agency cost theory. These theories primarily play a crucial role in testing and identifying the various aspects of loan capital to equity decisions. Still, there are no consistent results on the determinants of capital structure decisions, which are supporting the relevance of capital structure on the value of the firm, and another study concludes it does not have an effect on maximizing the value of the firm (Hayleslasie Tsegay Aregawi & B. Chandra Mohan Patnaik, 2018)
The capital structure of banks is still a relatively under-explored area in the banking literature. Currently, there is no clear understanding on how banks choose their capital structure and what factors influence their corporate financing behavior (Amidu M., 2007; Lalit Prasad Timilsina, 2020) .
Thus, countries in absence of a secondary market, the financing alternatives of corporate firm have become restricted/limited, corporate finance practitioners, financial policymakers and regulatory has a crucial role in addressing the issue. According to Hacini, I., Mohammedi, K., & Dahou, K. the specific aspects that affect the capital structure of the enterprises are determined by the country characteristics. Additionally, the size of the impact of the capital structure determinants is controlled by the characteristics of the country. However, it is not always possible to determine the ideal capital structure for businesses in developing nations using the theories that explain the capital structure of organizations in developed nations (Hacini I. Mohammedi K. & Daho K., 2022).
In fact, a variety of issues could lead to finance restrictions in developing nations. Because there is more information asymmetry in developing nations than in developed countries, businesses are perceived to be taking on more risk (Eldomiaty T. I., 2008). In addition, financial markets in developing countries are less efficient, which prevents the firms to choose the optimal capital structure.
Numerous studies have shown that the institutional framework, including the legal system, creditors' protection, financial system, fiscal system, and economic development, is one of the primary factors causing the disparities in capital structure between developed and developing countries (Delcoure N., 2007; González V. M. & González F., 2008; López-Iturriaga F. J. & Rodríguez-San J. A., 2008).
In addition, Myers states that the theories on capital structure are based on certain circumstances (Myers S. & Majluf., 1984). Ethiopia differs from other developing countries in such a way it has no secondary capital market which makes things easier for firms to raise funds and choose the best mix of debt and equity sources.
The capital structure issue has created a lot of debate in the field of corporate finance. The central question is whether there is an ideal level of leverage and if so, what factors might influence it. While many studies have been conducted in developed nations, more study is being conducted on this topic in developing nations. But very few studies have been conducted in Ethiopia on factors affecting capital structure decision up to this point. But, Even though a number of studies were done both in developed and underdeveloped nations, to date in Ethiopia only 12 studies conducted on capital structure decisions of commercial banks. The results of the studies conducted shows inconsistent findings.
This review was challenged by the absence of scientific papers presenting the factors affecting capital structure decision of banks in Ethiopia. Lack of access to known data base search was also the other limitations of the review. This in turn creates limitations on adopting and using scientific procedures of systematic literature review. The scope of the review was limited to factors affecting capital structure decision of commercial banks of Ethiopia.
Hence this review aims to present a systematic review of the literature on the factors affecting capital structure decision of commercial banks of Ethiopia. Thus, the initial challenge of this review is to identify relevant works and knowledge gaps, taking into account the various theoretical models and existing empirical studies. The final expectation is to identify new perspectives on this matter. Even if there aren't many researches done in Ethiopia, all those that are done at any given time are taken into account to identify any gaps that still need to be addressed.
Therefore, the primary purpose of this systematic literature review is to analyze and summarize the variables influencing the capital structure choices of Ethiopian commercial banks. The review also intends to critically synthesize the elements that influence capital structure decisions in order to identify the gaps in existing knowledge and the level of existing research in the field and to provide guidance for future research. As a result, this systematic literature review investigates the variables that influence the capital structure choices made by commercial banks in Ethiopia. It is undertaken to synthesis data on the variables that influence these choices in order to narrow the gap and give direction for further study.
To understand the focus of the review on capital structure decision of commercial banks literature, a systematic review was conducted using relevant and available scholarly studies that were published in any time period because of shortage of studies on the specified review. The reviewer has used systematic literature review methodology following Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) framework to analyze the research work on capital structure decisions.
A systematic review is a tool used to summarize, appraise and communicate the results and implications of a large quantity of research and information. It aims to provide an exhaustive summary of current literature relevant to the research question. The systematic review methodology is designed to reduce any unintended bias, which may occur in the use of other review methodologies (Bimrose J. Brown J. and Barnes S.A., 2005).
In the same manner Webster and Watson are states that a literature review aids theoretical advancement, highlights the domains with abundant research studies and unveils the areas that necessitate future research (Webster J. and Watson R., 2002). It is also defined as a specific method of locating existing studies, selection and evaluation of contributions, analysis and synthesis of information and evidence description, to allow clear and reliable conclusions about the subject under study (Denyer D. & Tranfield D., 2009).
Tranfield, D., Denyer, D., & Smart, P state that the reviewer defines the appropriate research sequences for the study. The seeking strategy is reported in sufficient detail to ensure the research to be replicated (Tranfield D. Denyer D. & Smart P., 2003). The research result should be a complete list of papers on which the review is based. Only studies meeting all the inclusion criteria specified in the review protocol are incorporated. In order to do so the review involves the following steps:
The first Step is identifying and checking the strengths and weaknesses of each database.
Up on identifying and checking the strength and weakness of the database the reviewer faced challenges because of the databases such as Scopus and web of science are not freely accessed and the other databases and search engines such as IEEE Computer Society (www.computer.org), ISI Web of Knowledge (apps.isiknowledge.com), ACM Digital Library (portal.acm.org) and PubMed have no research articles related to the subject matter. Therefore, absence of well-established database for business and economics are one of the major challenges to do this systematic literature review.
The second Step is the published articles on the concept of capital structure decisions to be reviewed should be explored in the pertinent database.
Third, the obtained articles need to be categorized using some logical/rational codes. The mentioned categorization should then be used to create a framework for the idea.
Fourth, the major findings should be presented using the logical codes, and the observations generated from the framework.
The last and most crucial step is to identify research gaps in order to open up possibilities for future research projects.
In addition, in order to do this systematic review the following set of inclusion criteria (IC) was defined to select those works that are relevant in the scope of the considered related work:
- Inclusion Criteria 1: The systematic review focuses on Factors affecting capital structure decisions of commercial Banks.
- Inclusion Criteria 2: The location of the review delaminated to commercial bank of Ethiopia.
- Inclusion Criteria 3: The document is written in English.
- • Inclusion Criteria 4: Since there is an absence of well-established database, the studies are searched from any access open search engines and databases such as Google scholar, Jstor, Emerald etc.
- • Inclusion Criteria 5: For the systematic review report the publicly available and published in peer-reviewed Journals, Books, Conferences or Workshops OR thesis are used as part of the peer-reviewed results.
Furthermore, the key words were used to identify the studies mainly conducted in Ethiopia on capital structure decisions of all firms. Based on the various key words, including capital structure, factors, Ethiopia, capital structure decisions, and determinants of capital structures, 42 studies on capital structure decision in Ethiopia were identified. 32 of those documents were identified through database searches, while an additional 10 studies were found in other records from various sources. Thus, the Number of records after duplicates removed was 42 studies.
After searching a studies related to the capital structure decisions in Ethiopia only 12 studies were identified on the factors affecting capital structure decisions of commercial banks in Ethiopia. The remaining 30 studies were conducted on various organizations such as manufacturing, MFI, insurance companies, and the like from Google scholar, Google, and research gate search engines. As a result, at the screening stage, 30 studies were eliminated from the target review because they were unrelated and their focus and cases were outside the review's scope.
Since the evaluation mainly addresses the factors affecting the capital structure of commercial banks in Ethiopia, 12 studies that have been conducted on commercial banks in Ethiopia were chosen based on the eligibility quality assessment. One study among the 12 full-text studies that were evaluated for eligibility was removed from the review because it did not meet the criteria for this review's eligibility.
Finally, a final sample of 11 research papers from the search engines was derived based on the inclusion and exclusion criteria to conduct the classification and analysis (refer Figure 2.1)
Classification is one of the most relevant aspects of systematization, as it identifies the main feature of the papers under review. The studies that finally met the delimitation criteria of this systematic review were analyzed for the research outlets. After selection, the review classified relevant studies based on various parameters to better understand the research done so far regarding factors affecting capital structure decisions.
To assess and synthesize the information on the existing research study, all the selected articles were well organized; classified and systematic analysis of the extant literature was performed based on the following parameters.
Introduction
This section presents and discusses the major findings of the systematic review. The analysis was conducted on a sample of 11 papers aiming at identifying knowledge gaps on the factors affecting capital structure decision of banks. To carry out this systematic review the study focusing on capital structure decision were identified mainly using Google scholar search engine, the descriptive analysis was made and the literature was classified based on different parameters to facilitate the presentation. When analysing the main researcher of the studies, it is noticed that all studies conducted in Ethiopia on factors affecting capital structure decision of banks were taken in to considerations.
Descriptive Analysis
A descriptive analysis of 11 studies was carried out to know the basic ongoing trend of publication on factors affecting the capital structure decisions of commercial banks in Ethiopia. . To answer the research question , the review have analyzed the publication trend, which is seen in terms of total publication by year, focus of the study, variable of interest, theories used, methodologies adopted in general and citations.
Year Wise Publications
This section provides the trend of literature on factors affecting capital structure decisions based on the publication frequency in terms of year.
Figure 1 depicts that the year wise distribution frequencies of the studies of capital structure decisions of banks in Ethiopia is uniform from the year 2008 to 2021 except for year 2017 which is the highest number of studies and 2020. Before the year 2008 there were no studies conducted in Ethiopia on factors affecting capital structure decision of banks which was published and freely accessed. Even 64% of the entire studies were MSc thesis and the remaining 36% constitutes published articles which show how much the study related to the subject matter was conducted in Ethiopia.
Focus of the study
The study focuses on bank specific factors and macroeconomic related factors. In general these two factors determine the factors affecting capital structure decisions of banks. Concerning the current literature review the studies conducted in Ethiopia on banks shows that the highest number of studies focuses only on bank specific studies whereas no one study separately focuses on macroeconomic related factors.
Theories backed
Following the birth of MM capital structure theory a lot of theories were emerged on the issues of capital structure. The main objective of this review is to show he factors affecting capital structure decisions of commercial banks of Ethiopia and describing the applicability of capital structure theories in the present business environment and identify the most accepted theory as per the studies under review. Figure 3 depicts that Trade off theory, pecking order theory, agency theory, signalling theory and market timing theory were the theories used in the studies under review. The first three theories Trade off theory, pecking order theory, and agency theory were almost used in all studies. Therefore, Figure 3 indicates that there is a marked predominance for Trade off theory (all studies ), which deals with the optimization of the capital structure, followed by Pecking order theory (9 studies), agency theories, Signalling theory and market timing theory.
Methodology
In general, figure 4 reveals the study distribution of the methodology, mixed research approach was highly employed next to quantitative research approach whereas no study solely employed qualitative research approach to study the factors affecting capital structure decisions of commercial banks of Ethiopia.
Variable of Interests
About Figure 5, it is observed a diversification of the variables used in the studies in relation to the topic factors affecting capital structure decision of commercial banks. The figure reveals that the first variable of interest highly explored is profitability which was used in all studies; Secondly Size, tangibility and growth were the second variables highly used in the studies including liquidity. On the other hand Earning volatility and interest rate were the variables of interest investigated and used in by few, among others.
Citation
Figure 6 shows that from all studies under review the second study (S2) is highly cited paper. The figure also depicts that S2, S3, S4, S5 and S8 are cited papers whereas the others are not cited.
Introduction
Modigliani and Miller (1958) published their ground-breaking work in 1958, which is when capital structure theory first emerged. They presented a global transaction cost and tax structure and came to the conclusion that the capital mix has no bearing on the firm's ability to achieve its objectives. However, after taking into account corporation taxes, they changed their minds, arguing that businesses subject to corporate taxes should be entirely financed by debt (Modigliani F Miller MH, 1963). Thus, according to the Modigliani Miller theorem, a firm's capital structure has no bearing on its value in an efficient market with no taxes, bankruptcy costs, or asymmetric knowledge. Capital structure decisions are made much more difficult when these values must be considered in the real world.
Then after one of the key areas of research in corporate finance is capital structure. Numerous studies have been done on how businesses choose their capital structures since the Modigliani Miller report was released. Since the 1990s, a lot of work has been put into figuring out how firms choose their sources of capital and what influences this structure. Prior research has also concentrated on the institutional disparities between developed and developing countries, which mostly drive these choices (Evrim Hilal Kahya & Koray D. Simsek, 2020; Floris P.P. Loermans, 2010).
As stated by R. BLGN Global capital structure research examines whether there are any differences in capital structure determinants between developing and developed nations. The orientation toward the financial system is one of the possibilities for these discrepancies. The existence of financial system orientation as a significant country-specific capital structure factor is supported by some literature (R.BİLGİN, 2019).
The findings suggest a relationship between a firm's capital structure and its financial system orientation in developing nations. Generally speaking, companies in nations with a history of civil law and advanced, market-oriented financial systems have greater leverage ratios. On the other hand, there is a relationship between the firm-specific capital structure variables and the level of financial development. In nations with a sophisticated financial system, the firm-specific variables found in the research hold true, but they are insufficient to explain capital structure decisions of enterprises in less developed financial systems.
However, the lack of an adequate capital market retards economic growth and makes it impossible to optimize firm capital structures. Because the public dominates the financial sector in African nations, particularly Ethiopia, share capital is not as freely available to foreign investors as it would be under a privatization. In nations suffering from a lack of a secondary market to raise money for the expansion of new as well as existing companies, bases for preference of financial source choices are limited. Various sources of funding may be used by different businesses, and variables affecting the capital structure of banking are no different (Hayleslasie Tsegay Aregawi & B. Chandra Mohan Patnaik, 2018).
The finding reveals that the study under review is concentrated on macroeconomic and bank-specific aspects. These two aspects often determine the variables influencing banks' capital structure decisions. In relation to the current literature analysis, research on banks done in Ethiopia reveals that the majority of studies solely concentrate on bank-specific research while no study specifically focuses on macroeconomic-related aspects.
Regarding the variable of interest, it can be seen that the variables utilized in the research in regard to the subject elements influencing the capital structure decision of commercial banks have diversified in to both bank specific and macroeconomic variables. The descriptive analysis shows that profitability, which was employed in all studies, is the first variable of interest that has been thoroughly studied; the second criteria that were frequently included in the studies, along with liquidity, were size, tangibility, and growth. On the other hand, interest rates, inflation, GDP, Risk, Age, Dividend payout and earning volatility were the variables that interested researchers looked at and utilized, among others.
Variable of Interests
It can be seen from the descriptive analysis of the variable of interests that a number of variables were employed as explanatory variables in the research pertaining to the subject factors influencing the capital structure decision of commercial banks of Ethiopia. The study shows that profitability, which was employed in all studies, is the first variable of interest that has been thoroughly investigated. The second factors thoroughly explored in the factors affecting capital structure decision of banks in Ethiopia next to profitability were includes size, tangibility, growth, and liquidity. In contrast, a few researches looked at and used the following variables: tax shield, GDP, risk, age, dividend payout, earning volatility, and interest rate.
One of the main theoretical controversies is the relationship between leverage and profitability of a firm. Profitability is a measure of earning power of a firm. The earning power of a firm is the basic concern of its shareholders. Profitability is one of the prime explanatory variables studied in the literature of capital structure. The majority of the analysis shows that profitability is negatively associated with the leverage and when the relationship is seen separately in different studies of the world and it is found to be negatively related with the leverage.
Different studies such as (Fama E. F. French K. R., 2002; Booth L. Aivazian V. Demirgüc-Kunt A. Maksimovic V., 2001; Baral K. J., 2004; Kennedy P.M. & Emmanuel M., 2015) argue that more lucrative businesses can borrow more money and that lenders of debt will be more eager to lend money because their likelihood of defaulting is lower than that of less profitable businesses. Profitable businesses have an increased incentive to use more debt to take advantage of debt interest tax shielding because they are also required to pay more taxes. There is disagreement on the theoretical and empirical findings regarding the relationship between profitability and capital structure. Both the trade-off hypothesis and the pecking order theory are supported by the findings from earlier research. Most research revealed a negative relationship between profitability and leverage, which is consistent with the pecking order theory, according to which businesses favor internal funding over external finance. This negative relationship is observed for both developed as well as developing countries (Chen J. Strange R., 2005).
In the same manner generally studies in Ethiopia regarding to profitability as an explanatory variable, the finding shows that statistically significant and negative relationship (Ravi Kanth Makarla & Tesfaye Degefa, 2019; W. Shibru H. Kedir &Y. Mekonnen, 2015; Kibrom M.F, 2010; Abdu M. Assfaw, 2020; W. Shibru, 2012; Gebreyes Begna, 2018; Tamiru Anley A., 2020; Merkin Messele, 2021) This explains why businesses typically use internal resources like retained earnings and owner's equity. Different areas may have different justifications for selecting internal funding. Businesses in developing regions lack other resources, and the cost of financing is also very expensive. Additionally, there is an asymmetry issue that makes equities expensive, and the capital markets are also underdeveloped (Kumar S. Colombage S. & Rao P., 2017).
While these criteria may not apply to developed countries, it is possible that profitability is very high and other sources of financing are easily accessible in these places, making the conventional sources less profitable. The enterprises generally adopt a balancing strategy, which also lends credence to the pecking order hypothesis of capital structure. Although some research have indicated a favorable correlation, when taking into account the whole impact, including the region-specific impact of profitability, it is discovered to be inversely associated to the leverage (Kumar S. Colombage S. & Rao P., 2017).
Similarly the trade-off argument is supported by Frank & Goyal's findings that profitability and leverage have a positive relationship. Businesses with better profitability have more borrowing capacity, which reduces risk for lenders. Therefore, because more lucrative companies are better able to repay their debts, debt holders will be more ready to lend them money (Frank M. Z. Goyal V. K, 2004).
According to Huang & Vu Thi, debt can be used as a strategy to lower agency expenses. Since debt is linked to required interest payments, using greater debt restricts the management's ability to act (Huang H. Vu Thi T., 2003). Therefore, it would be wise for profitable organizations to employ greater debt as a tool to discipline managers in order to maximize free cash flow (Bauer P ., 2004). Therefore, it is anticipated that enterprises with higher profitability will have higher levels of leverage due to increased lending capacity, reduced agency costs, and the benefit of tax shields, resulting in a positive link between profitability and leverage.
The capital structure trade-off theory is supported by this finding. The aforementioned conclusions show that there is evidence to support both the pecking order theory of capital structure and the trade-off theory. Both theories' justifications for their claims are sound.
Nevertheless, some studies, notably (Adugna G., 2017; Yohannes E, 2017; AHMED M., 2017) have demonstrated that there is no relationship between profitability and the leverage ratio of commercial banks in Ethiopia. Their findings are against the pecking order theory, the tradeoff theory, and the previous studies of capital structure.
The other most explored variables are size of the bank, tangibility and growth. The finding of the studies concerning these explanatory variables tangibility, liquidity and growth are contradicting with each other and the literature whereas the size of the bank is similar to the literature (M. A. Rehman Shah, 2017; Ben Ukaegbu and Isaiah Oino, 2013; Aremu M. A. EKPO. I .C MUSTAPHA A. M A Salami Isaac, 2013). The following table shows the summary of the studies conducted in Ethiopia on the factors affecting capital structure decision of commercial banks with the explanatory variables.
Table 4.1: Factors affecting capital structure decisions: Explanatory variables in 11 studies
|
|
Explanatory Variables |
Number of studies on Factors affecting capital structure decision of Commercial banks in Ethiopia |
|||||||||||
|
S1 |
S2 |
S3 |
S4 |
S5 |
S6 |
S7 |
S8 |
S9 |
|
S10 |
S11 |
||
|
1 |
Profitability |
-ve |
-ve |
-ve |
-ve |
-ve |
-ve |
-ve |
0 |
-ve |
|
0 |
0 |
|
2 |
Size |
-ve |
+ve |
+ve |
+ve |
+ve |
+ve |
+ve |
+ve |
+ve |
|
0 |
na |
|
3 |
Tangibility |
na |
-ve |
0 |
-ve |
-ve |
-ve |
-ve |
-ve |
-ve |
|
-ve |
0 |
|
4 |
Growth |
-ve |
0 |
0 |
0 |
0 |
+ve |
0 |
0 |
-ve |
|
+ve |
na |
|
5 |
Age of the Bank |
+ve |
na |
+ve |
na |
na |
na |
-ve |
na |
na |
|
na |
0 |
|
6 |
Dividend Payout |
-ve |
na |
na |
na |
na |
na |
na |
na |
na |
|
+ve |
na |
|
7 |
Liquidity |
na |
-ve |
na |
na |
-ve |
+ve |
0 |
-ve |
0 |
|
-ve |
na |
|
8 |
Risk |
na |
0 |
na |
na |
0 |
na |
na |
na |
0 |
|
0 |
na |
|
9 |
Earning volatility |
na |
na |
na |
+ve |
na |
na |
na |
na |
na |
|
na |
na |
|
10 |
Tax Shield |
-ve |
na |
+ve |
na |
na |
na |
+ve |
+ve |
na |
|
+ve |
na |
|
11 |
GDP |
-ve |
na |
na |
0 |
na |
na |
na |
na |
na |
|
0 |
+ve |
|
12 |
Inflation |
+ve |
na |
na |
0 |
na |
-ve |
na |
na |
na |
|
0 |
na |
|
13 |
Interest rate |
na |
na |
na |
na |
na |
na |
na |
na |
na |
|
na |
-ve |
|
Number of research duration in Year |
9 |
11 |
9 |
8 |
11 |
9 |
6 |
10 |
8 |
|
5 |
12 |
|
Note:
- -ve stands for statistically significant and negative relationship with capital structure decision (leverage ratio)
- +ve stands for statistically significant and positive relationship with capital structure decision ( leverage ratio)
- na stands for the variable was not used in the study (Not available)
- 0 indicates there is no relationship or it does not affect capital structure (statistically insignificant
- S1 stands for study 1
Citation analysis
A citation shows the relationship between the cited item and the citing document. Citation analysis is a method for gathering pertinent studies. It aids in locating the most significant studies pertinent to the task at hand. The number of citations is used as a measure of the quality of the literature used in the analysis. A higher number of citation counts are positively related with the study's quality. Citation count high-face validity is used to derive the citation analysis measure (Kumar S. Colombage S. & Rao P., 2017).
To identify influential writers and their papers in capital structure research, citation analysis of the sample of publications is carried out. It serves as a tool for gathering pertinent research since it makes it easier to determine which studies have the greatest impact on the subject area. The citation score serves as a benchmark because high citation scores are positively correlated with an article's quality (Kumar S. Colombage S. & Rao P., 2017). But the result of this review reveals that from eleven studies only five studies are cited and the remaining 6 studies are not cited. This reveals that how much the studies conducted in Ethiopia on factors affecting capital structure decisions of commercial banks are very poor and unexplored. Even from the total studies conducted 64% of the entire studies were MSc thesis and the remaining 36% constitutes a published article which reveals how much the study related to the subject matter was conducted in Ethiopia. Similarly Ding and Cronon argue that the relationship between the cited and the citing articles is depicted by the citation. Citation analysis determines the prominence and influence of an article in the scientific community by counting the number of times it is referenced in other works (Ding Y Cronin B, 2011). Therefore from this we can conclude that though the capital structure decision is controversial the attempt is very weak and poor.
Referring the year wise distribution of the studies, the finding shows that, with the exception of year 2017 and 2020, which have the highest number of studies, the frequency of studies of capital structure choices of banks in Ethiopia remains constant from the years 2008 to 2021. There were no published researches on factors influencing bank capital structure decisions in Ethiopia before the year 2008. Even considering the studies under review the quality of the paper was very poor, the fact that 64% of the total studies were MSc thesis and the remaining 36% were published articles. From the studies under review the most cited articles were (W. Shibru H. Kedir &Y. Mekonnen, 2015; Kibrom M.F, 2010; W. Shibru, 2012; Abdu M. Assfaw, 2020; Adugna G., 2017) respectively and the remaining six studies were not cited. The trend of the publications and the quality of the studies are not convincing and promising.
Theories backed
Following the development of the MM capital structure theory, numerous theories on capital structure-related issues have emerged. The main purpose of this review was to indicate the factors influencing the capital structure decisions of Ethiopian commercial banks, describe how capital structure theories apply in the current business environment, and identify the most widely accepted theory according to the studies under review. Trade off theory, pecking order theory, agency theory, signalling theory, and market timing theory were the theories used in the studies under evaluation, as indicated by the descriptive analysis (figure 3). Almost all studies used the first three theories: agency theory, trade-off theory, and pecking order theory. As a result , the descriptive analysis indicates that there is a marked predominance for Trade off theory (all studies ), which deals with the optimization of the capital structure, followed by Pecking order theory (9 studies), agency theories, Signalling theory and market timing theory.
Regarding the theories employed in the studies under consideration, certain findings indicate the pecking order theory is more applicable to the Ethiopian banking sector, whereas the static tradeoff theory and the agency cost theory were supported by limited evidence (W. Shibru H. Kedir &Y. Mekonnen, 2015; Gebreyes Begna, 2018; W. Shibru, 2012).
The empirical results of the study show that the capital structure decisions of Ethiopian private commercial banks are primarily explained by the two capital structure theories, static trade-off and pecking order (Abdu M. Assfaw, 2020) (Merkin Messele, 2021; Amidu M., 2007).
On the other hand, Tamiruu contends that the pecking order theory and the trade-off theory helped to understand the capital structure behavior of the Ethiopian banking system (Tamiru Anley A., 2020). Similar to this, Kebrom said that all three capital structure relevancy theories—Static trade-off, Pecking order, and Agency cost theory—are only partially recognized in Ethiopia's commercial banking industry, though Static trade-off theory has more supportive evidence (Kibrom M.F, 2010).
In the same manner Yohanis contends that the pecking order theory was relevant to the Ethiopian banking sector, but the trade-of theory and the market-timing hypothesis lacked substantial evidence (Yohannes E, 2017). However, the other two investigations were unable to determine the study's position (Ravi Kanth Makarla & Tesfaye Degefa, 2019; Adugna G., 2017). Although the review aims to advance knowledge of capital structure choices by looking at the variables influencing commercial banks in Ethiopia and emphasizing both bank and macroeconomic characteristics, it makes little progress in the empirical capital structure literature in terms of establishing the relative importance of country-level factors for capital structure choices. The results of the investigations and the theoretical underpinnings were contradictory and incoherent.
This study conducts a systematic literature review of the capital structure choice made by the commercial bank of Ethiopia with the purpose of exploring the factors influencing capital structure decisions and critically summarizing it to identify the gap and the level of the studies in the field and provide directions for further research. A systematic review of pertinent and readily available academic publications published in any time period was undertaken to understand the focus of the review on the capital structure decision of commercial banks. Based on the year-wise distribution, the study's focus, the citations analysis, variables of interest, and theories supported, the descriptive analysis offered by this systematic literature review was an invaluable tool for evaluating significant contributions on the issue under examination.
The majority of studies found a link between profitability and leverage that was negative, which is consistent with the pecking order theory, which holds that businesses prefer internal funding over external financing. Both developed and developing nations exhibit this negative association. Profitability is the explanatory variable that has been investigated the most among those that were employed in all of the studies, according to the descriptive analysis.
The findings show a statistically significant and negative relationship between leverage and profitability. This result is consistent with the findings of earlier studies, although it is incongruent with some other literature that contends that profitability has a positive effect on bank leverage.
However, some research, most notably, has shown that there is no relationship between profitability and the leverage ratio of Ethiopian commercial banks. Their findings contradict the trade-off theory, the pecking order theory, and previous capital structure studies.
The size of the bank, tangibility, and growth are the additional factors that are frequently addressed. While the size of the bank is consistent with the literature, the findings of the studies regarding the explanatory factors tangibility, liquidity, and growth are in conflict with one another and the literature.
Though the issue of capital structure decision is controversial, the findings of the review shows that the level and quality of the studies on capital structure decisions of banks in Ethiopia in all aspect is very poor and under studied.
In the banking literature, the subject of bank capital structures is still largely unexplored. At the moment, it is unclear how banks decide on their capital structure and what influences their business financing behaviour.
Determining the capital structure is particularly difficult, especially in developing nations like Ethiopia where there are no secondary financial markets. As a result, in nations without a secondary market, corporate firms' financing options are now more constrained or restricted. Corporate finance professionals, financial policymakers, and regulatory authorities must work together to address this problem.
Since the studies conducted on the factors affecting capital structure decision of commercial banks of Ethiopia was very few in number and the results were not convincing for policy implications, for academicians and researchers it is advisable to further study on the reviewed title to provide genuine recommendations.
The banking literature still doesn't cover the capital structure of banks very much. There is currently a lack of clarity regarding how banks determine their capital structure and what variables affect their corporate financing behavior. Therefore, it is recommended that the concerned body and authority conduct an in-depth study of the decisions banks make about their capital structure by identifying pertinent elements.
The authors declare they have no competing interests.
Availability of data and materials all data generated or analyzed during this study are included within the submitted manuscript
Competing interest – as an author we declare that there are no competing interests
Funding -Not applicable
Authors’ contribution – All authors equally contributed.
Acknowledgement – Not applicable
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Competing interest – as an author we declare that there are no competing interests.