Determinants of Capital Structure; A Study of Listed Banks in Colombo Stock Exchange in Sri Lanka

Abstract

This study employs a pooled ordinary least square regression to analyze the determinants of the capital structure of 28 Listed Banks Finance & Insurance Companies in Colombo Stock Exchange for the period of 2008-2012 and further evidence of the capital structure theories. The results reflect the intermediate nature of the Sri Lankan corporate environment. The study suggests that some of the insights from modern finance theory of capital structure are moveable to Sri Lanka in that certain firm-specific factors that are relevant for explaining capital structure in developed economies are also relevant in Sri Lanka. Statistical results show that tangibility, profitability, growth, and liquidity are negatively related to the debt ratio, while size is related positively. Non-debt tax shield is not significantly related to the debt ratio. Furthermore, this results consistent with the forecasts of the trade-off theory, pecking order theory, and agency theory, and provide some help in understanding of financing behaviour of Sri Lankan firms. Also, this study explores the determinants of capital structure of Banks Finance & Insurance Companies of Sri Lankan firms and these findings will help to decision makers and policy makers to make optimal decisions.