Determinants Of Capital Structure – A Case In Sri Lanka

Abstract

This paper features a cross- sectional regression analysis of the determinants of the company debt to total assets ratios of a sample of 74 Sri Lankan manufacturing companies for the period 1998-2002. The regression equations include a set of variables acting as proxies for likely determinants of debt ratios suggested in the empirical literature such as profitability, business risk, corporate size, growth rate and age. The study shows that profitability was significantly related to debt ratios of Sri Lankan companies. This finding confirms that more successful firms consistently fund their investment projects using retained earnings and have a lower debt ratio compared to their unsuccessful counterparts. Corporate size and growth rate were not significantly related to firms’ debt ratios. The negative coefficient of asset structure and positive coefficient of business risk go against the theoretical predictions.