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Firm-Specific Determinants of Insurance Companies’ Capital Structure in Ethiopia

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Studies on Economic Development and Growth in Selected African Countries

Part of the book series: Frontiers in African Business Research ((FABR))

Abstract

This study examines the impact of firm-specific characteristics on capital structure (CS) decisions of the Ethiopian insurance industry. The study used panel-fixed effects robust standard error regression models, the DEBT model, and the DE model using financial statements of eight insurance companies covering the period from 2005 to 2014. To validate the results, it conducted normality, multi-collinearity, heteroskedasticity , autocorrelation , and robustness tests. We found pecking order, static trade-off, and agency cost theories as the most important in explaining CS decisions of insurance companies in Ethiopia though the pecking order theory appeared to be dominant. The empirical findings of the models indicate that profitability and liquidity are significant in determining Ethiopian insurance companies ’ financing decisions, while business risk and size of the firm are insignificant in shaping their behavior. On the other hand, firms’ asset tangibility and growth opportunities had a significant impact on the total debt ratio, while these factors were insignificant for the debt–equity ratio.

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Correspondence to Yitbarek Takele .

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Appendices

Annexure 1: Model Selection

POLS model regression, fixed effects (or LSDV) regression model, and the random effects model regression results of the DEBT model regression

Variable

POLS

LSDV

Fixed effects

Random effects

gro

0.119***

0.076**

0.076**

0.089***

tang

−0.280***

−0.137*

−0.137*

−0.204***

pr

−0.755***

−0.583***

−0.583***

−0.645***

Risk

−0.409***

−0.319**

−0.319**

−0.328***

size

0.003

0.014

0.014

0.015

lq

−0.183***

−0.120***

−0.120***

−0.147***

ID

    

2

 

−0.015

  

3

 

−0.65*

  

4

 

0.014

  

5

 

−0.019

  

6

 

−0.489***

  

7

 

−0.073***

  

8

 

−0.0566**

  

_cons

0.949***

0.615*

0.582

0.651**

N

80

80

80

80

  1. Note *p < 0 0.05; **p < 0.01; ***p < 0.001
  2. Source Structured review of annual financial report (generated using STATA)

POLS model regression, fixed effects (or LSDV) regression model, and the random effects model regression results of the DE model regression

Variable

POLS

LSDV

Fixed effects

Random effects

gro

0.496*

0.283

0.283

0.496*

tang

−0.833**

0.061

0.061

−0.833**

pr

−3.220***

−2.128**

−2.128**

−3.220***

Risk

−1.530**

−0.802

−0.802

−1.530**

size

0.119

0.220

0.220

0.119

lq

−0.674***

−0.345*

−0.345*

−0.674***

ID

    

2

 

−0.157

  

3

 

−0.335

  

4

 

−0.099

  

5

 

0.093

  

6

 

−0.189

  

7

 

−0.467***

  

8

 

−0.244

  

_cons

−0.273

−2.673

−2.673

−0.273

N

80

80

80

80

  1. Legend *p < 0 0.05; **p < 0.01; ***p < 0.001
  2. Source Structured review of annual financial report (generated using STATA)

Breusch and Pagan LM test for DEBT model

Breusch and Pagan Lagrangian multiplier test for random effects: DEBT model

lev [ID, t] = xb + u[ID] + e[ID, t]

Estimated results:

  
 

Var

sd = sqrt (var)

lev

0.0069

0.0832

e

0.0008

0.0291

u

0.0003

0.0180

Test: var (u) = 0

\( {\mathbf{Chi}}^{{\mathbf{2}}} ({\mathbf{01}}) = 10. 6 3 \)

\( {\mathbf{prob}} > {\mathbf{Chi}}^{{{\mathbf{2 }}}} = 0.000 6 \)

  1. Source Structured review of annual financial report (generated using STATA)

Breusch and Pagan LM test for DE Model

Breusch and Pagan Lagrangian multiplier test for random effects: DE model

lev[ID, t] = xb + u[ID] + e[ID, t]

Estimated results:

  
 

var

sd = sqrt (var)

lev

0.164

0.405

e

0.046

0.215

u

0

0

Test: var(u) = 0

\( {\mathbf{Chi}}^{{{\mathbf{2}} }} ({\mathbf{01}}) = 0.00 \)

\( {\mathbf{prob}} > {\mathbf{Chi}}^{{{\mathbf{2 }}}} = 1.0000 \)

  1. Source Structured review of annual financial report (generated using STATA)

Hausman LM test for DEBT model

Coefficients

 

(b)

(B)

(b − B)

Sqrt (diag(v_b − v_B))

 

Fixed effects

Random effects

Difference

S.E

gro

0.076

0.089

−0.13

.

tang

−0.137

−0.206

0.069

0.370

pr

−0.583

−0.645

0.062

0.014

risk

−0.319

−0.329

0.087

0.067

size

0.016

0.015

0.001

0.009

lq

−0.120

−0.147

0.027

0.012

b = consistent under \( H_{0 } \) and \( H_{a } \); obtained from xtreg

B = inconsistent under \( H_{a} \) and efficient under \( H_{0 } \); obtained from xtreg

Test: \( H_{0 } :{\text{difference}}\;{\text{in}}\;{\text{coefficiens}}\;{\text{not}}\;{\text{systematic}} \)

\( Chi^{2 } (6) = \)

(b − B)′[(v_b − v_B) ^ (−1)] (b − B)

=

17.21

\( {\text{prob}} > Chi^{2 } = \)

0.0085

  1. Source Structured review of annual financial report (generated using STATA)

Hausman LM test for DE Model

 

Coefficients

 

(b)

(B)

(b − B)

Sqrt (diag(v_b −v_B))

 

Fixed effects

Random effects

Difference

S. E

gro

0.283

0.496

−0.213

.

tang

0.061

−0.834

0.893

0.358

pr

−2.128

−3.222

1.094

0.329

risk

−0.802

−1.530

0.728

0.639

size

0.220

0.119

0.102

0.0903

lq

−0.345

−0.674

0.329

0.115

b = consistent under \( H_{0 } \) and \( H_{a } \); obtained from xtreg

B = inconsistent under \( H_{a} \) and efficient under \( H_{0 } \); obtained from xtreg

Test: \( H_{0 } :{\text{difference}}\;{\text{in}}\;{\text{coefficiens}}\; {\text{not}}\;{\text{systematic}} \)

\( Chi^{2 } (6) = \)

(b − B)′[(v_b −v_B) ^ (−1)] (b − B)

=

22.10

\( {\text{prob}} > Chi^{2 } = \)

0.0012

  1. Source Structured review of annual financial report (generated using STATA)

Modified Wald test for group-wise heteroscedasticity in fixed effects regression: DEBT model

\( H_{0 } :{\text{sigma}} (i)^{2} = {\text{sigma}}^{2} \;{\text{for}}\;{\text{all}}\;i \)

\( Chi^{2 } (8) = 4 9.00 \)

\( {\text{prob}} > Chi^{2 } = 0.000 \)

  1. Source Structured review of annual financial report (generated using STATA)

Modified Wald test for group-wise heteroscedasticity in fixed effects regression: DE model

\( H_{0 } :{\text{sigma}} (i)^{2} = {\text{sigma}}^{2} \;{\text{for}}\;{\text{all}}\;i \)

\( Chi^{2 } (8) = 1 1 2 9. 2 5 \)

\( {\text{prob}} > Chi^{2 } = 0.000 \)

  1. Source Structured review of annual financial report (generated using STATA)

Annexure 2: Diagnostic Tests

Test of normality for DEBT model: Shapiro–Wilk Test

\( H_{0 } \): The distribution is normal

Variable

Obs.

W

V

z

Prob > z

lev

80

0.980

1.339

0.640

0.261

  1. Source Structured review of annual financial report (generated using STATA)

Test of normality for DE model: Shapiro–Wilk test

\( H_{0 } \): The distribution is normal

Variable

Obs.

W

V

z

Prob > z

lev

80

0.990

0.682

−0.838

0.799

  1. Source Structured review of annual financial report (generated using STATA)

Tests of multi-collinearity: correlation matrix between explanatory variables

 

Gro

Tang

pr

Risk

Size

Lq

gro

1.000

     

tang

−0.246

1.000

    

pr

0.328

−0.100

1.000

   

risk

−0.101

0.043

−0.367

1.000

  

size

0.027

−0.213

0.449

−0.731

1.000

 

lq

0.306

−0.243

0.1429

0.238

−0.289

1.000

  1. Source Structured review of annual financial report (generated using STATA)

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Takele, Y., Beshir, D. (2017). Firm-Specific Determinants of Insurance Companies’ Capital Structure in Ethiopia. In: Heshmati, A. (eds) Studies on Economic Development and Growth in Selected African Countries. Frontiers in African Business Research. Springer, Singapore. https://doi.org/10.1007/978-981-10-4451-9_8

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