The External Determinants of Capital Structure - Evidence from Sri Lankan Listed Firms

Abstract

Capital structure decision is crucial to the financial well-being of any compa ny. This study investigates the effect of ex ternal determinants on capital structure of Sri Lankan listed Companies. A total of 50 companies listed in Colombo Stock Exchange (CSE), are analyzed during the period from 2007 to 2011, using panel data . Prime lending rate, rate of inflation, GDP growth and size of capital market were used as independent variables, while leverage ratios such as total debt ratio, long term debt ratio and short term debt ratio were the dependent variables. Fixed and random effect panel regression models were used here. The findings indicate that there is no concrete evidence that there is a relationship between external factors and leverage .The res ults revea led that only prime lending rate was statistically significant with all three leverage ratios (with total debt ratio, short term debt ratio and Jong term debt ratio) of the companies.