Determinants of Corporate Investments Decision Making: Evidence from Commercial Banks in Ethiopia

Abstract

This study aims to analyze institutional quality, macroeconomic, and firm-specific determinates of corporate investment decision-making. The paper uses the panel regression technique with data for the period of 2013 to 2022 for Ethiopian commercial banks. The positivism research paradigm and explanatory research design were used for this study. The data were collected from the yearly financial reports of the sampled commercial banks, the annual reports of the Ministry of Finance, and the World Bank data websites. Furthermore, a sample of sixty (16) commercial banks was selected from the total population of 30 commercial banks. The method of data analysis started by estimating the pooled OLS model and subsequently using the Breusch-Pagan Lagrangian Multiplier (LM) test to check the suitability of pooled OLS for this model; otherwise, the model will be tested with random effects and subsequently diagnosed using the Hausman test for the correlated random effects, which give hints on the suitability of either random or fixed effects for the model. The random effect model was found to be appropriate for this study objective based on the model test results. The regression result of the study indicated that institutional quality factors such as political stability and rule of law have a positive and statistically significant effect on commercial bank investment decisions. On the other hand, government effectiveness and regulatory quality have a negative and statistically significant effect on the investment decisions of commercial banks. Among the macroeconomic factors, inflation has a negative and statistically significant effect on the investment decisions of Ethiopian commercial banks. On top of these firm-specific variables, only bank size has a negative effect, and, if not at 5%, at 10%, it has a statistically significant effect on the investment decisions of commercial banks.