Factors determining capital structure: an analysis of listed companies in the colombo stock exchange in Sri Lanka

Abstract

Capital structure/ financial leverage describe the combination of debt and equity capital. A business concern can go for different levels of capital structure. It is determined by several factors. the objectives of this study are to investigates the impact of determinants of capital structure on leverage level (Long term debt ratio) and to identify the significant relationship between the determinants of capital structure andLong term debt ratio (LTD) with a sample of 34 listed companies in the Colombo stock exchange (CSE) in Sri Lanka over the period of five years from 2009 to 2013. Companies/firms were selected by using the convenient sampling technique and the availability of the necessary data. Four factors such a profitability, liquidity, tangibility and firm size were taken as a independent variable and Long term debt ratio was used as dependent variable to measure the leverage level / capital structure. For the purpose of this study, the secondary data was extracted from the annual reports of the selected listed companies from beverage food and tobacco and manufacturing sector. The collected data were analysed using the multiple regression and correlation analysis with usage of SPSS -20 versions. The findings revealed that the determinants of capital structure such as profitability (PROF) and liquidity (LIQ) were significantly negatively correlated with leverage level (Long term debt ratio) while Tangibility(TANG) has a significant positive relationship with level of leverage but Firm size (FSIZE) has no significant relationship withleverage level (LTD). Further determinants of capital structure have a significant impact on leverage level (LTD) in manufaturing and Beverage food and Tobacco sector in the CSE in Sri Lanka.