Firm-Level Determinants of Capital Structure Decisions of Construction Companies in Ethiopia

Abstract

The study aimed to identify firm-level determinants of capital structure decisions of Grade I construction companies in Ethiopia. We analyzed audited financial statements of 5 of the 24 Grade I construction companies that met the selection criteria and showed their willingness to participate in the study. The study period covered from 2007 to 2012. We employed a fixed effect panel regression model to analyze study results. Fixed effect is a preferred model when one cannot consider the observations to be random draws of a large population. Of the nine firm-level antecedent variables, only non-debt tax shield, firm age, and earnings volatility explained the financing decisions of Grade I construction companies. The three variables explained 54% of the variance in the outcome variable during the study period. The results also signpost these variables can predict 41% of the future variation in capital structure decisions. Further, though both trade- off and pecking order theories explain the capital structure decision of the firms under study, the trade-off theory appears to be more competent. Moreover, we found SUR Construction PLC to be less leveraged than the other four Grade I construction companies. We, thus, recommend SUR Construction PLC make use of its underutilized debt capacity to finance profitable projects and achieve better growth. Finally, given the limited participation by Grade I construction companies, the conclusions of the study need to be carefully considered.