Abstract:
This study investigates the determinants of capital structure of firms and the
relationship between capital structure and the value of firm listed in Colombo Stock
Exchange (CSE) Sri Lanka. The study involved 51 companies listed in CSE and has tested
data for the period of ten years from 2005 to 2014. The Panel Data regressions model
used to test the theoretical relationship between the financial leverage and
determinants of the firms. The result reflected that all the variables are significantly
affect on the capital structure decisions. Profitability, growth opportunity and non debt
tax shield found negative association with the leverage while tangibility showed
positive relationship with leverage ratio. The research found that the profitability,
tangibility, growth opportunity and non debt tax shield are some key determinants of
the capital structure decisions in Sri Lanka. Moreover, same sample and same method
were used to analysis the relationship between capital structure and the firm value. The
result of the study revealed that, share price and earnings per share have positive
significant impact on leverage and price earnings has negative insignificant impact on
leverage. Therefore, the end result revealed that capital structure has significant
impact on firm’s value.
