Abstract:
The primary objective of the study is to get a clear picture about the influence
of the capital structure (i.e. leverage level) on shareholders' return in Banking
Industry within the Sri Lankan context. The characteristic of Sri Lankan is different
from other western countries the replication of those studies too may leads to unique
findings.
Based on understanding of the Sri Lankan context and capital structure puzzles in
general researcher was introduced to study the influence of capital structure on the
return on equity, that is to assess the impact of leverage on the return on equity in Sri
Lankan context.
Financial decisions are very critical in viewpoint of individual companies and
economy as a whole. Thus the primary objective of this research is to provide a clear
view on the relationship between the leverage level and return on equity as far as
possible, there by assist to apply this knowledge in financing, investing and consulting
activities.
There are two variables taken into consideration those are independent variable and
dependent variable in this study, under the independent variable Leverage of capital
structure and under the dependent Variable Return on Equity have been selected for
this research Listed and unlisted private bank in the banking industry, which will be
the sample frame, for this study secondary data was used. Published data was
collected from the selected company annual reports and Colombo Stock Exchange
publications; a simple random sampling method was used in selecting 10 sampling
units for the research and also Last five year data of the selected companies that is
from 2006 to 2010 were collected from the said data sources
This study is to determine the relationship between the return on equity and capital
structure and assessing the strength the relationship between them. Regression
analysis was used to determine the relationship and then correlation coefficient was
computed to assess the strength of the relationship. The coefficient determination (r2)
was computed to see the degree of variation in dependent variable attributable to
i
factors other than the level of financial leverage. Finally F-test was carried out to
ascertain the one tail probability that the variances in debt to equity ratio and return on
equity are not significantly different.
The subsequent empirical works done by various researchers concluded mostly
around the traditional view. A comprehensive industry wise study was carried out by
Pandey (1981), which also produced different patterns of behaviors. Except few more
empirical works falls somewhat in favor of traditional view.