The Effect of Institutional Quality, Macroeconomic and Firm Specific Factors on Corporate Financing Decision-Making: Evidence from Commercial Banks in Ethiopia

Abstract

This study investigates the impact of institutional quality, macroeconomic indicators and firm-specific factors on the capital structure and financing decisions of commercial banks in Ethiopia. Utilising a panel data regression approach, the study analyses a sample of 16 commercial banks out of a total population of 30 over the period 2015–2025. Data were sourced from bank financial statements, the Ministry of Finance and the World Bank. Employing a random-effects model, the empirical findings reveal that among the institutional quality variables, political stability exerts a positive and statistically significant influence on financing decisions, whereas regulatory quality has a significant negative effect. Macroeconomic factors were found to have no statistically significant impact. Regarding firm-specific determinants, asset size significantly increases financing leverage, while fixed capital intensity and credit risk demonstrate significant negative relationships. Consequently, policy recommendations suggest that the government enhance regulatory frameworks to foster healthy competition and improve financial intermediation, thereby encouraging banks to maintain prudent capital ratios and mitigate excessive risk-taking.