Abstract:
This paper attempts to analyze the compositions of the capital structures of the 40
firms listed on the CSE. Moreover, it aims to assess the relationship between the Debt
to Equity (D/E) ratio and the market capitalization (firm value) of the selected firms.
Further, key financial indicators such as short term interest bearing borrowings, long
term interest bearing borrowings and share-holders funds have been considered. The
information related to short term interest bearing borrowings, long term interest
bearing borrowings and share-holders funds are also obtained. Minority interest is
disregarded to prevent inaccurate results. For the purpose of the analysis the firms are
categorized into low geared ( <0.35 ), moderately geared ( 0.36 – 0.55 ) and high
geared ( > 0.56 ). The study does not take into account firms in the Financial Sector.
The reason for their exclusion is the existence of a different set of determinants that
impact the leverage decision due to their different business model and cyclical factor
that skews the data sample. The analysis reveals a mean D/E ratio of 0.39-0.44 across
all industries which may indicate mean reverting tendencies to firms, which lending
institutions and investment banks could capitalize on, in order to identify potential
issuers of debt or equity. In addition, analysis has clearly established that short term
debt is the most preferred form of finance with a mean leverage of 0.21 and a standard
deviation of 0.13 whereas long term debt indicated a mean of 0.16 and a standard
deviation of 0.19. Firms that had foreign ownership too indicated low levels of
gearing with the mean leverage amounting to 0.11. Whilst appreciating the varying
leverage compositions in firms across varying industries the study demonstrates that
the theory may not hold true under specific instances for firms listed on the CSE.
Finally results further reveal that overall gearing levels is one of the variables that
influence firm value and that additional variables such as revenue, profitability, taxes etc. should be factored in as an area of further study to assess the impact on overall
firm value.
