The Multivariate Linear Regression Model before Estimation

W = β0 - β1 DEB - β2 DIV - β3 PRO - β4 GRO - β5 SIZ - β6 TAX - ei

The dependent variable is wealth measured in terms of net assets value (W) and the
explanatory variables debt policy (DEB), dividend policy (DIV), profitability (PRO), growth
(GRO), size (SIZ), and tax shield (TAX); measured with the most known proxies. The beta
values (β) explain how much of the variation in the dependent variable is explained by the
estimated linear regression model.

The regression result generated based on the above specified model has two parts. The first
upper section shows the overall nature of the model which demonstrates if the data regressed
is reliable in general and the second one is about the prediction equation. Thus, results from
the regression analysis are revealed in table 4.10 and are interpreted in relation to each of the
independent variables with the help of STATA application version 10 particularly using the F
statistics, P values and t values, as follows.

Table 4.10 Regression Matrix for Wealth and the Explanatory Variables
Source | SS df MS Number of obs = 36
----------+------------------------------- F (6, 29) = 58.20
Model | 2.12471207 6 .354118679 Prob > F = 0.0000
Residual | 0.176443294 29 .006084252 R-squared = 0.9233
---------+------------------------------- Adj R-squared = 0.9075
Total | 2.30115537 35 .065747296 Root MSE = 0.078
Wealth | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------+---------------------------------------------------------
Debt | -0.0324727 0.0064337 -5.05 0.000 -0.045631 -0.0193144
dividend | -0.0145969 0.0305586 -0.48 0.636 -0.0770962 0.0479024
profit | 0.1339794 0.1768451 0.76 0.455 -0.2277095 0.4956683
growth | -0.0055417 0.0425717 -0.13 0.897 -0.0926106 0.0815271
size | 0.2767881 0.0685285 4.04 0.000 0.1366316 0.4169447
tax | 0.5322268 0.078435 6.79 0.000 0.3718184 0.6926353
_cons | 2.3651900 0.4258816 5.55 0.000 1.494165 3.2362160

The overall nature of the model illustrated in Table 4.10, above, shows the summary of
regression model run to investigate the effect of the explanatory variables on commercial
banks’ wealth creation. Hence, the explanatory power of the model, as can be seen from the
R-squared and adjusted R-squared are 92.33% and 90.75%, respectively. This implies that
92.33% or adjusted 90.75% of the change in the wealth of commercial banks in Ethiopia is
successfully explained by the variables in the study, whereas the remaining 9.25% of the
variability in the value maximization is caused by other factors that are excluded from this
study. As measured by the F-statistics, the overall significance level of the model is 58.2 with
P-value of 0.0000 proving that the model is well fitted at l% level of significance.

On the agenda of the prediction equation, it is only a useful exercise if the independent
variables in the dataset have some correlation with the dependent variable. So, in addition to
the prediction components of the equation, the coefficients on the independent variables and
the constant value, someone needs some measure to tell how strongly each independent
variable is associated with the dependent variable. Note that when running the regression, it is
trying to discover whether the coefficients on the independent variables are really different
from 0, implying that the independent variables are having a genuine effect on the dependent
variable, or if alternatively any apparent differences from 0 are just due to random chance.

The size of the coefficient (coef) for each independent variable gives the size of the effect that
variable is having on the dependent variable, and the sign on the coefficient (positive or
negative) gives the direction of the effect. In regression with multiple independent variables,
the coefficient tells how much the dependent variable is expected to increase/decrease when
that independent variable increases/decrease by one, holding all the other independent
variables constant. The standard error (Std. Err.) is an estimate of the standard deviation of
the coefficient, the amount it varies across cases.

The t - statistic (t) is the coefficient divided by its standard error. It can be thought of as a
measure of the precision with which the regression coefficient is measured. If a coefficient is
large compared to its standard error, then it is probably different from 0. How large is large?
The regression model compares the t statistic on the respective variable with values in the t -
distribution to determine the P-value (p>|t|), which is the number that should really need to be
looking at. And finally, the confidence interval (95% Conf. interval) tells the interval in
between which the coefficient for each independent variable is found.

4.4.2.1 Regression Analysis between Debt Policy and Wealth

To see the objective of the study achieved, the subsequent table 4.11 illustrates the regression
result between wealth (dependent variable) and debt policy (independent variables).
 Ho1 = There is no positive relationship between debt policy and wealth creation.
Ha1 = There is positive relationship between debt policy and wealth creation.

Table 4.11 Regression Matrix for Debt Policy and Wealth

Dependent variable Coefficient Std error t - value P - value

Debt policy -0.0324727 0.0064337 -5.05 0.000***

No. of observation 36 36 36 36
*significant at 10% level **significant at 5% level ***significant at 1% level

The first research hypothesis (H01 ) was developed to assess the relationship between debt
policy and wealth. The above Table 4.11 demonstrates that there is no positive relationship of
debt policy and wealth of commercial banks in Ethiopia where increase in debt to equity ratio
by one Birr results in decrease to wealth of commercial banks by 3.2 cent. Thus, this study
notifies capital structure has a negative relationship with wealth and is statistically significant
at 1% significance level. this results was consistency with Ogidieo(2007) and Hiesen(2004).

4.4.2.2 Regression Analysis between Dividend Policy and Wealth

Table 4.12, below, presents the result of the regression in which there was negative and
insignificant relationship between the dividend policy and wealth of commercial banks in
Ethiopia indicating one Birr cash dividend made to owners during an accounting period
results in decrease to wealth of share holders by 1.5 cent.

Ho2 = There is no positive relationship between dividend policy and wealth

creation.

Ha2 = There is positive relationship between dividend policy and wealth creation.

Table 4.12 Regression Matrix for Dividend Policy and Wealth

Dependent variable Coefficient Std error t - value P - value

Dividend policy -0.0145969 .0305586 -0.48 0.636

No. of observation 36 36 36 36
*significant at 10% level **significant at 5% level ***significant at 1% level
The p-value in the above Table 4.12, i.e., 63.6% indicates that the dividend policy of firms in
commercial banking sector in Ethiopia has insignificant effect on wealth making goal
because the result did not fit with the specified levels of significance for which reason
irrelevant effect comes to occur from cash payout policy.