CAPITAL STRUCTURE, INDUSTRY INFLUENCE, AND FINANCIAL PERFORMANCE: EVIDENCE FROM SRI LANKA

Abstract

This study examines the impact of capital structure together with their industry influence on financial performance of the companies listed in the Land and Property, Plantation, Beverage Food and Tobacco sectors of the Colombo Stock Exchange (CSE) for a period of five years from 2011 to 2016. Data for the study was collected from published annual reports and the sample consists of 51 companies in these sectors. Regression based capital structure models were employed to investigate the phenomenon. The results reveal that the return on assets ratio is significantly correlated with all the capital structure proxies and the net profit margin has significant correlations with the long term debt to funds ratio and total debt to funds and short term debt ratio. The long term debt to funds ratio and the total debt to funds ratio are significant in determining the return on assets ratio. The long term debt to funds ratio has a significant relationship with the return on equity ratio. Moreover, industry in which a company operates has a significant impact on the level of financial performance. The findings of the study are important for managers, existing and potential investors and future researchers. Managers should focus on the results of the study on the impact of capital structure on financial performance when determining the sources of financing to minimise the cost of capital and to enhance profitability. The investors should focus on the same when making investment decisions and identifying the impact of the capital structure on return enables them to make informed decisions.