Abstract:
1. Introduction
This research explores the impact of capital structure on firm value for
listed companies in Sri Lanka. While global studies exist, findings specific
to Sri Lanka remain inconclusive. By addressing this gap, the study aims
to clarify how capital structure decisions affect firm value in the unique
economic and regulatory context of Sri Lanka.
2. Research Methodology
The study is quantitative in nature. Tobin's Q and the price-to-earnings
ratio were used to measure the dependent variable, firm value, while the
equity ratio, debt-to-assets ratio, and total debt ratio were used to assess
the independent variable. The study ended with 244 sample companies
listed on the CSE. Companies belonging to the financial sector were
excluded from the sample, and data were gathered from the audited
financial statements over the past five years, starting from 2018. The
collected data were analyzed through descriptive, correlation, and
regression on panel data analyses.
3. Findings and Discussion
The study finds that an optimal capital structure reduces financial risk
and boosts firm value, fostering sustainable growth. It also highlights the
role of industry-specific factors and macroeconomic conditions in shaping
capital structure strategies. Using regression analysis and industry
comparisons, the research demonstrates that tailored financial strategies
are essential to address the unique challenges faced by Sri Lankan firms.
These findings offer valuable insights for practitioners and policymakers,
emphasizing the need for context-specific approaches to financial
management.
4. Conclusion and Implications
By presenting empirical data on the effect of capital structure on firm
value, this study advances the conversation on corporate finance. It is an
essential tool for researchers, investors, and business executives who want
to make informed decisions in a constantly changing financial
Environment. This study adds to the body of knowledge by shedding light
on the mechanisms by which capital structure affects firm value
