The Determinants of Capital Structure: An empirical Analysis of Listed Manufacturing Companies in Colombo Stock Exchange Market in SriLanka

Abstract

Capital structure/leverage level of the firm determined by several factors. Proper capital structure leads the firm to achieve the better performance and ensures the sustainability in its operation. Even though there are several factors contribute to the institutional performance, determinants of the capital structure play an important role. Therefore it is necessary to identify that what are factors contribute to the firms’ capital structure composition in its operation. Hence the present study was undertaken with the objective of finding out the relationship between capital structure determinants and leverage level of the listed companies in SriLanka. Using a multiple regression analysis, the leverage behavior of the listed manufacturing companies in Colombo stock exchange market in SriLanka was examined for the period of 2003-2007. The final sample consists of 19 manufacturing companies. In this study, dependent variable that is, leverage level of the companies, is measured by long- term debt ratio, shortterm debt ratio and total debt ratio. Capital structure determinants (independent variables) are measured by capital intensity, tangibility, profitability, firm size and nondebt tax shield. Findings showed that the direction of the explanatory variables such as, tangibility, profitability, firm size and non-debt tax shields with total debt largely consistent with the explanations of trade - off theory and prove past empirical findings also.