Abstract:
The study investigates capital structure of a sample of 69 firms listed in
the Colombo Stock Exchange. Generalized Method of Moments (GMM)
estimator is employed for an unbalanced panel data for years, from 2006
to 2010.The dynamic analysis is conducted using a combination of the
GMM approach and instrumental variables to check for endogeneity in
variables. Consistent with prior literature, the study finds a significant
negative influence of profitability, size, growth and operating risk on the
debt ratio of firms. The firms do not rely on optimal capital structures
and the financial policies to follow a financial hierarchy in Sri Lanka.
The asset structure has a significant negative impact on financial
leverage; growth affects negatively to leverage suggesting that the large
firms have easy access to equity markets and become low levered. Small
firms rely on the credit market of Sri Lanka. The firms use retained
earnings largely, hence the increased revenue results in low debt ratio.
The results indicate that the firms do not follow a target debt ratio, and
are consistent with the pecking order theory for finance.
