CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE: EVIDENCE FROM SELECTED BUSINESS COMPANIES IN COLOMBO STOCK EXCHANGE SRI LANKA Puwanenthiren Pratheepkanth Department of Accounting, University of Jaffna, Sri Lanka ABSTRACT Capital structure is most significant discipline of company’s operations. This researcher constitutes an attempt to identify the impact between Capital Structure and Companies Performance, taking into consideration the level of Companies Financial Performance. The analyze has been made the capital structure and its impact on Financial Performance capacity during 2005 to 2009 (05 years) financial year of Business companies in Sri Lanka. The results shown the relationship between the capital structure and financial performance is negative association at -0.114. Co-efficient of determination is 0.013. F and t values are 0.366, -0.605 respectively. It is reflect the insignificant level of the Business Companies in Sri Lanka. Hence Business companies mostly depend on the debt capital. Therefore, they have to pay interest expenses much. Keywords: Capital Structure; Performance; Business Companies
International Refereed Research Journal ■ www.researchersworld.com ■ Vol.– II, Issue –2,April 2011
-Journal of Arts, Science & Commerce ■ E-ISSN 2229-4686 ■ ISSN 2231-4172
To understand how companies finance their operations, it is necessary to examine the determinants of their financing or capital structure decisions. Company financing decisions involve a wide range of policy issues. At the private, they have implications for capital market development, interest rate and security price determination, and regulation. At the private, such decisions affect capital structure, corporate governance and company development (Green, Murinde and Suppakitjarak, 2002). Knowledge about capital structures has mostly been derived from data from developed economies that have many institutional similarities (Booth et al., 2001). It is important to note that different countries have different institutional arrangements, mainly with respect to their tax and bankruptcy codes, the existing market for corporate control, and the roles banks and securities markets play. Capital structure refers to a mixture of a variety of long term sources of funds and equity shares including reserves and surpluses of an enterprise. The historical attempt to building theory of capital structure began with the presentation of a paper by Modigliani & miller (MM) (1958). They revealed the situations under what conditions that the CS is relevant or irrelevant to the financial performance of the listed companies. most of the decision making process related to the CS are deciding factors when determining the CS, a number of issues e.g. cost, various taxes and rate, interest rate have been proposed to explain the variation in Financial Leverage across firms (Van Horne,1993; Hampton,1998; Titman and Wessels,1998).these issues suggested that the depending on attributes that caused the cost of various sources of capital the firm’s select CS and benefits related to debt and equity financing The relationship between capital structure and financial performance is one that received considerable attention in the finance literature. How important is the concentration of control for the company performance or the type of investors exerting that control are questions that authors have tried to answer for long time prior studies show that capital structure has relating with corporate governance, which is the key issues of state owned enterprise. To study the effects of capital structure or financial performance, will help us to know the potential problems in performance and capital structure.
2. LITERATURE REVIEW
Modigliani and Miller (M & M) (1958) wrote a paper on the irrelevance of capital structure that inspired researchers to debate on this subject. This...