Determinants of Financial Institutions Leverage in Tanzania: Trade- off Theory versus Pecking Order Theory

Abstract

Trade-off theory and pecking order theory have evolved as two competing theories to explain how financial managers make capital structure decision. However, theoretical and empirical debate on capital structure remains inconclusive. Most studies have applied these corporate finance theories to large and listed firms mostly in the developed world. Financial institutions are lending institutions with different risk and return from the corporate firms. This paper attempts to shed light on whether or not financial institutions in developing countries such as Tanzania exhibit the capital structure that conforms to standard finance theories.To address these challenges, a study was conducted from two listed financial institutions in Tanzania namely, CRDB and NMB. The data were captured from Dar es Salaam Stock Exchange (DSE) annual financial statements covered a six years period, from 2010-2015. The data were analyzed using Pearson's product moment correlation analysis. The findings have shown that the relationships between financial institutions leverage and age of financial institutions, liquidity, asset tangibility, size, growth opportunities and profitability support the assumptions of trade-off theory. Therefore, it is safe to conclude that the determinants of the financial institutions leverage in Tanzania conform to the assumptions of trade-off theory.