The purpose of the study is investigating the determinants of capital structure for Small Scale Manufacturing Firms (SSMFs) in Ethiopia. Hypotheses utilizing trade-off, pecking order and agency theories are empirically examined using a series of firm characteristics: size, tangibility, profitability, earning volatility, age and macroeconomic variable (GDP growth rate, inflation rate and interest rate). A structured record review was made to collect a panel data, which include 20 SSMFs year observations of 11 years over the period 1998 – 2008 E.C.
The findings suggest that profitability, earning volatility, age, growth, GDP, inflation rate and interest rate variables are the most important determinants of capital structure of SSMFs in Ethiopia. The findings also reveal that the dominant capital structure theories (trade-off, pecking order, and agency theories) appear indeed to be valid for Ethiopian SSMFs’ capital structure; in fact, trade-off theory best explains Ethiopian SSMFs’ capital structure. All firm specific variables except Size, tangibility and growth variables seem to have an effect on the level of leverage in Ethiopian SSMFs.
1. INTRODUCTION
1.1. Background of the Study
1.2. Statement of Problem
1.3. Hypotheses
1.4. Objectives of the Study
1.4.1 General objective
1.4.2 Specific objective
1.6. Significance of the Study
1.7. Scope and Limitation of the Study
2. LITERATURES REVIEW
2.1. Definition of Capital Structure and Small Scale Manufacturing Industries
2.2. Theories of Capital Structure
2.2.1. Trade-off Theory
2.2.2. Pecking Order Theory
2.2.3. Agency Theory
2.3. The Determinants of Capital Structure
2.3.1. Size
2.3.2. Tangibility
2.3.4. Earnings Volatility
2.3.5. Growth
2.3.6. Age
2.3.7. External Determinants of Capital Structure
2.4. Empirical literature Review of study
2.5. General result of the empirical study
2.6. Conceptual Framework
3. RESEARCH METHODOLOGY
3.2. Research Approach
3.3. Sampling Design
3.4. Variables in the Study
3.4.1. Dependent Variable
3.4.2. Independent Variables
3.6. Data Analysis Technique
3.7. Model Specification Test
3.7. Classical Linear Regression Assumptions and tests
4. ANALYSIS RESULTS AND DISCUSSION
4.1 Descriptive analysis
4.3 Model Specification Test
4.3.1 Test of Data stationary or non-stationary
4.4 CLRM Assumptions and Diagnostic Tests
4.4.1 Normality Test
4.4.2 Multicollinearity Test
4.4.3 Correlation Analysis
4.4.4 Autocorrelation Test
4.4.5 Heteroscedasticity Test
4.5 Regression Analysis and Discussion of Results
4.5.1 Regression Analysis
4.5.2 Discussion of Results
5. Conclusions and Recommendations
5.1 Conclusions
5.2 Recommendations
Research Objectives and Key Topics
The primary objective of this study is to investigate the determinants of capital structure for Small Scale Manufacturing Firms (SSMFs) in Ethiopia and to test the empirical validity of dominant capital structure theories—specifically the trade-off, pecking order, and agency theories—within this sector.
- Firm-specific determinants of capital structure (size, tangibility, profitability, earning volatility, growth, and age).
- Macroeconomic variables influencing financing decisions (GDP growth rate, inflation rate, and interest rate).
- Application of panel data analysis using random effects models for Ethiopian manufacturing firms.
- Comparative analysis of how different financial theories explain leverage in small-scale vs. large-scale industries.
- Policy implications for improving financial management and access to capital for SSMFs in Ethiopia.
Excerpt from the Book
1.1. Background of the Study
Manufacturing is critical and is probably the most important engine of long-term growth and development. As countries transform from primary agricultural-based economies to Manufacturing based ones, more sustainable revenue for growth is obtained. Manufacturing industry in Ethiopia started in 1920s with a simple processing technology that produces agriculture-based products; but still the sector is infant -even by African standards, dominantly focusing on semi-processing.
According to CSA(central statistical agency) census report of 1994 the vast majority of countries rely on the dynamism, resourcefulness and risk-taking of private enterprises (to which most small scale manufacturing enterprises belong) to trigger, sustain the process, and form the base for private sector led of economic growth. In this regard, small scale manufacturing industries are playing an ever-increasing role in the manufacturing industrial structure of the country. Expansion and development of the sector increases agricultural productivity through providing agricultural inputs and creating demand for agricultural outputs.
Furthermore, small scale manufacturing industries play a key role in stimulating other sectors of the economy such as trade, construction and services and in reducing unemployment CSA census (1994). Basic data on manufacturing output, input, employment, fixed assets, investment and capacity are of paramount importance for designing and formulating industrial development programs, strategies and policies. Capital structure represents a firm's financial framework which consists of the debt and equity used to finance the firm CSA (1994). Firms’ ability to carry out their stakeholders’ requirements is closely related to capital structure. Therefore, this foundation is an imperative piece of information that should not be disregarded. Capital structure in financial term means the way firms finance their assets through the mixture of equity, debt, or hybrid securities (Saad, 2010). In a nutshell, capital structure is a mixture of a company's debts (long-term and short- term), common equity and preferred equity (Akintoye, 2008). Capital structure is fundamentally on how a firm finances its overall operations and growth by using diverse sources of funds (Tsuji, 2011)
Summary of Chapters
CHAPTER ONE: INTRODUCTION: This chapter introduces the study, covering the background of the manufacturing sector in Ethiopia, the problem statement, research objectives, and hypotheses related to capital structure determinants.
CHAPTER TWO: LITERATURES REVIEW: This chapter reviews theoretical perspectives (trade-off, pecking order, agency theories) and empirical evidence concerning firm-specific and macroeconomic determinants of capital structure.
CHAPTER THREE: RESEARCH METHODOLOGY: This chapter outlines the quantitative approach, sampling design, variable measurement, and the econometric models (panel regression) used for data analysis.
CHAPTER FOUR: ANALYSIS RESULTS AND DISCUSSION: This chapter presents the empirical findings, diagnostic tests (normality, multicollinearity, autocorrelation, heteroscedasticity), and the discussion of regression results.
CHAPTER FIVE: Conclusions and Recommendations: This chapter summarizes the research conclusions regarding the determinants of capital structure in Ethiopian SSMFs and provides recommendations for stakeholders and future research.
Keywords
Capital structure, Small Scale Manufacturing Firms (SSMFs), Ethiopia, leverage, trade-off theory, pecking order theory, agency theory, firm-specific determinants, macroeconomic variables, GDP growth, inflation, interest rate, profitability, panel data analysis.
Frequently Asked Questions
What is the primary focus of this research?
The research investigates the factors that determine the capital structure (debt-equity mix) of Small Scale Manufacturing Firms (SSMFs) in Ethiopia.
What theories are used to explain capital structure in this study?
The study relies on three dominant theories: the trade-off theory, the pecking order theory, and the agency theory.
What is the primary research objective?
The main objective is to identify the most significant firm-specific and macroeconomic determinants of capital structure for Ethiopian SSMFs and to evaluate which theory best explains their financing behavior.
Which methodology is applied?
The research uses a quantitative approach, specifically panel data regression (utilizing random effects models) with E-Views and STATA software.
What does the research cover in the main analysis?
The main analysis evaluates nine independent variables—including size, tangibility, profitability, growth, and age—alongside macroeconomic factors like GDP growth, interest rates, and inflation against the firm's leverage ratio.
Which keywords characterize the study?
Key terms include capital structure, SSMFs, Ethiopia, leverage, trade-off theory, pecking order theory, and macroeconomic determinants.
Why are macroeconomic variables included in this specific study?
Macroeconomic variables like inflation and interest rates are included because previous studies in Ethiopia often focused only on internal factors; the author includes these to better account for the external economic environment affecting financial risk.
What is the significance of the findings for Ethiopian businesses?
The findings help firm managers understand which factors impact their financing costs and structure, enabling them to make better decisions to optimize capital and maximize firm value.
- Arbeit zitieren
- Dereje Yohannis (Autor:in), 2019, The Determinants of Capital Structure in Ethiopian Small Scale Manufacturing Industry Firms, München, GRIN Verlag, https://www.grin.com/document/508908
