Capital structure determinants in the Ethiopian insurance industry: a dynamic panel approach

This study examines the determinants of capital structure among Ethiopian insurance companies using a dynamic panel framework. It analyzes 17 insurers over 2014–2025, comprising 204 firm-year observations. The bias-corrected least squares dummy variable (LSDVC) estimator is the primary method, complemented by fixed-effects estimation with Driscoll–Kraay standard errors (DK-FE-SE). The results reveal no statistically significant leverage persistence, providing limited support for the dynamic trade-off theory. Tangibility and firm size are negatively and significantly associated with leverage, while profitability, liquidity, non-debt tax shields, and the effective tax rate are insignificant. Inflation positively affects leverage under LSDVC, although its significance is sensitive to cross-sectional dependence. Overall, the findings align more closely with elements of the pecking order theory, particularly the role of internal financing capacity, although neither theoretical framework fully explains insurers’ financing decisions. These patterns may reflect regulatory capital requirements, policyholder obligations, and underdeveloped credit markets. The study recommends developing capital markets, maintaining macroeconomic stability, strengthening risk-sensitive regulation, and incorporating macroeconomic risks into insurers’ financing strategies. The findings contribute to the limited empirical literature on capital structure in Sub-Saharan African financial markets.