An Investigation of the Capital Structure Policy of Egyptian Banking Sector Firms

Abstract

This research examines the relationship between capital structure and three of its major determinants proposed in the prior literature - profitability, growth rate and size. Our sample includes data for all banks listed in Kompass Egypt, in the period 1995-2007. We utilize panel data regression analysis and show that the total debt ratio is negatively affected by both the bank's return on assets and its earnings growth rate. However, in contrast with the prior literature, the size of the Egyptian banks (measured by total assets) is a weak predictor of their capital structure. Interestingly, only 10% to 20% of the total debt ratio variances are explained by profitability and growth rate, the rest being due to company-related and stable in time idiosyncrasies. Our results differ when we attempt to explain short-term and long-term debt with the same determinants.

Keywords: capital structure, banks, panel data, Egypt, profitability, growth rate, size, ratio analysis

JEL Classification: G21, G32, C33