Impacts of Firm-Specific Factors on Capital Structure and Firm Value: Empirical Evidence from Sri Lankan Listed Firms

Abstract

Finance decisions and capital structures play a crucial role in a company's management, and different forms of financing result in distinct capital structures, which may have different effects on firm value. Most studies left out the implications of adjusting firm-specific variables on capital structure and firm value. This study explored the impact of firm-specific factors on capital structure and firm value and used a sample of 90 companies listed on the Colombo Stock Exchange. The secondary data were gathered from annual reports using panel data for a period of eight years, from 2013 to 2020. Ratios of long-term debt to equity and market price of a share to book value were used to measure the capital structure and firm value, respectively, while profitability, tangibility, growth opportunity, firm size, liquidity, and earning volatility were taken as firm-specific factors. Analysis tools such as bivariate correlation and linear regression were used to evaluate the econometric model, hypothesis test, and relationships. The study found that tangibility has a significant impact on capital structure. Tangibility and firm size have a significant impact on firm value. This study reveals that tangibility determines both capital structure and firm value. This study confirms the mediating role of capital structure between tangibility and firm value. Tangibility correlates positively with capital structure and negatively with firm value. The finding suggests that investing in non-current assets will result in long-term financing, borrowings and a drop in the market price of a share. This study has revealed contradictory findings compared with previous empirical evidence obtained from published data. Therefore, a further study should be conducted to enhance the credibility and validity of the findings by investigating chief financial officers via structured questionnaires for the same constructs and variables.