Dessertation 25

FACTORS AFFECTING CAPITAL STRUCTURE
DECISIONS
(EMPIRICAL EVIDANCE FROM SRILANKAN LISTED COMPANIES)

MM.SAMZUN NIHARAH
INDEX NO: MG0644

DEPARTMENT OF MANAGEMENT
FACULTY OF MANAGEMENT AND COMMERCE
SOUTH EASTERN UNIVERSITY OF SRI LANKA
OLUVIL
2014

FACTORS AFFECTING CAPITAL STRUCTURE
DECISIONS
(EMPIRICAL EVIDANCE FROM SRILANKAN LISTED COMPANIES)

MM.SAMZUN NIHARAH
INDEX NO: MG0644

This dissertation submitted to the Department of Management Faculty of
Management and Commerce of the South Eastern University of Srilanka in
partial fulfillment of the requirement for the awards of the Degree of Bachelor of
Business Administration Special in Accounting

DEPARTMENT OF MANAGEMENT
FACULTY OF MANAGEMENT AND COMMERCE
SOUTH EASTERN UNIVERSITY OF SRI LANKA
OLUVIL
2014

DECLARATION

I do hereby declare that this work has been originally carried out by me the
guidance of A.Moahemed Sheham Lecturer (prob) in Accounting, Department of
Accountancy and Finance and this work has not been submitted elsewhere for
any other degree.
I certify that this dissertation does not incorporate without due
acknowledgement of any material previously submitted for degree or diploma in
any university. It does not contain any material previously published or
unpublished by another person except where due reference is made in the text.

.
Signature of Candidate
MM.Samzun Niharah
The researcher
Faculty of Management and Commerce,
South Eastern University of SriLanka,
Oluvil.

CERTIFICATION

This is to certify that the dissertation entitled Factors affecting Capital Structure
Decision (Empirical evidence from Srilankan Listed Companies) Submitted by
MM.Samzun Niahrah Index No SEU/IS/08/MG/040 to the faculty of
Management and Commerce of South Eastern University of Srilanka in partial
fulfillment of the requirements for the award of the degree of Bachelor of
Business Administration Special in Accounting. This is her original work based
on the studies carried out independently by her during the period of study under
my guidance and supervision.
This is also to certify that above dissertation has not been previously formed the
basis for the award of any degree, diploma fellowship or any other similar title.

.
Signature of Supervisor
M.A.MohamedSheham
Lecturer (prob) in Accounting,
Department of Accountancy and Finance,
South Eastern University of Srilanka,
Oluvil.

ACKNOWLEDGEMENTS

It is with a lot of gratitude and appreciation that I acknowledge the help of my
supervisor, Lecturer A.Mohamed Sheham, who has helped me to complete this
Dissertation. The Dissertation would not have reached this stage in the present form
without his help. He has given mesupport throughout the entire process. I am hugely
indebted to him for all the hours he spent reading my texts, writing suggestions and
comments for me, and helping me to shape my thinking in many ways. I greatly
appreciate his expertise in the field of my research.

I must express my profound thanks to my guardians without their support; I would not
have achieved this stage. Last, but not least, I would also like to thank to my friends, I
have learned many things from them.

MM.Samzun Niharah
The researcher
Department of Accountancy and Finance,
South Eastern University of SriLanka.

ABSTRACT

With the financial crisis came an increased awareness and interest in companies
capital structures. Numerous studies have conducted empirical investigations of this
topic, yet no research exists on the factors affecting capital structure decisions in
Srilankan Listed Companies. This dissertation conducts an analysis of the factors
affecting capital structure on a dynamic panel data set from a sample of 40 Sri Lankan
listed companies in the period 2009-2013.

Support for the pecking order theory and trade-off theory are examined and the
analysis find support for the trade-off theory as well as support for the pecking order
theory. Correlation and regression models had used to analyze the panel of data.

The results show that Srilankan listed companies adjust towards their target capital
structure with 55.2 % and results conclude that firm Leverage is determine through
profitability, size, tangibility and growth. Moreover there are positive relationship
between profitability and tangibility while negative relationship between size and
growth.

In the Srilankan context accordance with research results tradeoff theory is mostly
influence theory among Srilankan listed company.

This dissertation is dedicated to my
beloved Mom Mrs. Jannath Shahib for
her great inspiration &commitment on
my life

TABLE OF CONTENT
Contents Page
Declaration 18
Certification 18
Acknowledgement 18
Abstract 18
Dedication 18
List of tables 18
List of figures18
List of abbreviation 18

1. CHAPTER ONE-INTRODUCTION
1.1. Objective of the chapter
1.2. Background of the research
1.2.1. Importance of the capital structure
1.2.2. Research motivation
1.3. Problem identification
1.4. Research Questions
1.5. Research objectives
1.6. Hypothesis and Conceptual frameworks
1.6.1. Hypothesis
1.6.2. Conceptual framework
1.7. Signification of the study
1.8. Methodology
1.8.1. Data Source
1.8.2. Sample design
1.8.3. Mode of analyze
1.9. Limitation of the Study
1.10. Organization of the study

2. CHAPTER TWO LITERATURE REVIEW
2.2. Defining capital structure
2.3. Capital structure theory
2.3.1. Modigliani and Miller theory
2.3.2. Tradeoff theory
2.3.2.1. Static tradeoff theory
2.3.2.2. Dynamic tradeoff theory
2.3.2.3. Packing order theory
2.3.2.4. Market timing theory
2.4. Factors affecting capital structure decisions
2.4.1. Leverage
2.4.2. Profitability
2.4.3. Tangibility
2.4.4. Size
2.4.5. Growth
2.5. Previous empirical studies on capital structure

3. CHAPTER THREW- METHODOLOGY
3.2. Research design
3.3. Data and data collection
3.3.1. Sampling design
3.3.1.1. Research sample
3.3.1.2. Data source
3.4. Variable measurement
3.4.1. Variables
3.4.1.1. Leverage
3.4.1.2. Profitability
3.4.1.3. Size
3.4.1.4. Tangibility
3.4.1.5. Growth opportunity
3.5. Conceptual framework
3.5.1. Conceptual framework for research questions

3.5.1.1. Hypothesis development
3.5.1.2. Leverage
3.5.1.4. Size
3.5.1.6. Growth
3.6. Hypothesis testing
3.6.1.1. Regression
3.7. Limitation of the research

4. CHAPTER FOUR- PRESENTATION OF DATA AND ANALYSIS
4.2. Factors affecting decision of capital structure
4.2.1. Results of correlation and regression analysis for the variables
4.2.1.1. Correlations
4.2.1.2. Regression
4.3. Testing hypothesis
4.3.1.2. Size
4.3.1.4. Growth
4.3.1.5. Impaction on leverage by profitability, size, tangibility, size
and tangibility
4.4. Summarized hypothesis testing

5. CHAPTER FIVE- CONCLUTION AND RECOMENTATION
5.2. Conclusion
5.3. Conclusion regarding results and its consistency with condition of Sri
Lankan capital market
5.4. Recommendation and suggestion for further research.
Reference
Appendix A

Appendix B
Appendix C
Appendix D
Appendix E
Appendix F
Appendix G

LIST OF TABLES
Table 1: Dependent and independent variables and its definitions
Table 2: Calculation of dependent and independent variable
Table 3: Summary implications of capital structure theories and empirical evidences
on the relationship of capital structure determinants with leverage.
Table 4: correlation analysis of variables
Table 5: Regression Estimates of Determinants of Capital Structure
Table 6: Summarized Hypothesis Testing

LIST OF FIGURES

CHAPTER 01
INTRODUCTION

1.1 Objective of the Chapter

This chapter offers anintroduction to this research. Furthermore the chapter gives
introduction to capital structure and answers the question that why is it interesting
and important to do research in the area of capital structure of company?

1.2 Background of the Research

1.2.1 The Importance of Capital Structure Theory

At the time a firm faces a financial deficit that affects its financial condition; the
manager of the firm should be able to make a managerial decision as well as a
financial decision in order tomaintain the viability of the firm. One way that can be
chosen is to undertake a capitalrestructuring, especially debt restructuring. The
decision taken on debt restructuring, of course,requires expertise and analytic
capabilities so managers can make the right decisions of financialrestructuring for the
company.

An ideal composition of capital structure which consists of debt andequity will
minimize the cost of capital and maximize the firms value. Therefore, it is
importantfor the firms manager to understand the theory of capital structure. The
sources of funds include retained earnings, debt, and equity. Retained earnings is
thecheapest fund for the funding source as it does not have explicit costs in the same
way as fundsobtained from outside sources. When the company uses debt to finance
investments which has animpact on costs rising in its capital structure, the company
will have a financial risk, because thecompany must consider their priority in the
structure of debt, debt maturity, decision of mixed debtto certain parties or to the
investor, and other types of debt contracts (Peirson, Brown, Easton andHoward, 2002;
Barclay et al., 2003).

If a firm uses stocks as its capital structure, either common stocks or preferred stocks,
then the shareholders of those stocks are the owner of the company. While debt has

due date, the stocks do not have one. Thus the repayment of stocks is not necessarily
required since stocks are liquidated if the company went bankrupt. Issuing the stocks
may reduce the authority of the oldowners in the company. To maintain the
dominance of the existing owner of the company, the issuance of stocks is managed
not to cross the line of power. The cost of the issuance of stocks is dividend which
will be distributed to shareholders. Furthermore, debt can be treated as tax
deductibleexpenses, but common stock dividend payments and preferred stocks are
not tax deductible.

Firms capital structure decision can be viewed from the following theories:
Modigliani Miller theory, pecking order theory, and trade-off theory. The theory of
business finance in a modern sense starts with the Modigliani and Miller (1958)
capital structure irrelevance proposition. Before them, there was no generally
established theory of capital structure. The debate about how and why firms choose
their capital structure began in 1958 (Myers, 2001), when Modigliani and Miller
(1958) published their famous arbitrage argument showing that the market value of
any firm is independent of its capital structure. Modigliani and Miller start their
theory by assuming that the firm has a particular set of expected cash flows. When the
firm chooses a certain proportion of debt and equity to finance its assets, what it has
to do is to divide up the cash flows among investors. Investors and firms are assumed
to have equal access to financial markets, which allows for homemade leverage. As a
result, the leverage of the firm has no effect on the market value of the firm.
Modigliani and Millers theory influenced the early development of other capital
structure theory.

The introduction of taxation effects imply that firms should, theoretically, try to
increase their debt levels as much as possible (Miller, 1988). However, other theorists
(for example Stiglitz, 1974; 1988) added limitations to the optimal level of firm debt
by arguing that bankruptcy costs enhance as the firms level of debt increases, and
this places a higher limit on the amount of debt that should be present in a firms
capital structure. This evolved into the static trade-off theory, which proposes that
firms attempt to achieve an optimal capital structure that maximizes the value of the
firm by balancing the tax benefits, with the bankruptcy costs, associated with
increasing levels of debt (Myers, 1984). Some researchers have identified problem

areas in the capability of the static trade-off theory to explain actual firm behavior.
For example Myers (2001) argued that the static trade-off theory implies that highly
profitable firms should have high debt ratios in order to shield their large profits from
taxation, whereas in reality, highly profitable firms tend to have less debt than less
profitable firms. Warner (1977) suggested that bankruptcy costs are much lower than
the tax advantages of debt, implying much higher debt levels than predicted by the
theory.

There is, however, also some empirical evidence and theoretical support for the idea
that firms, at least in part, raise their capital structure to take advantage of the interest
tax shield (net of the interest tax burden to investors), while ensuring that they avoid
acquiring excessively high financial distress costs. For example, Kayhan and Titman
(2004) found that, over the long term, firms do tend to move towards target debt ratios
consistent with the theory. Static trade-off theory therefore offers one possible
explanation of how firms choose their capital structure.

Myers observed how firms actually structure their balance sheets, and found that
firms tend to follow a pecking order in financing their projects: first they use
internal equity, then debt, and only then do they use external equity (Myers, 1984). In
contrast to Ross (1977), who argued that firms use more debt to overcome
information asymmetries and signal better prospects, Myers (2001) used information
asymmetries to argue that managers are unlikely to issue equity, because they fear it
will signal that the stock price is overvalued. In addition to the evidence presented by
Myers, several other studies have given support to the pecking order theory. For
instance, Allen (1993), like Fama and French (1988), found that leverage is inversely
related to profitability, which supports the pecking order theory view that debt is only
issued when there is insufficient retained income to finance investment.

Therefore, capital structure decision is influenced by a pecking order preference,
which has advantages and disadvantages based on the pecking order theory, and
trading off cost and benefit of using debt based on trade-off theory, in order to
maximize return and minimize cost of capital.

The pecking order theory describes the financing patterns of growth firms better than
of mature firms as mature firms are more closely followed by analysts and are better
known to investors, and hence should suffer less from problems of information
asymmetry. Study result is consistent with the theory, and also consistent with the
previous research findings of ShyamSunder and Myers (1999). They propose a direct
test of the pecking order and find strong support for the theory is on a sample of large
firms.

The theorys prediction that firms with the greatest information asymmetry problems
(specifically young growth firms) are exactly those which should be raising financing
choicesaccording to the pecking order theory. In general, the significant difference
between mature andyoung firms is not that mature firms are larger, but because they
are more mature which impliesthat mature firms are older, more stable, higher
profitable with few growth opportunities and goodcredit histories. Growth firms are
thus more suited to use internal funds first, and then debt beforeequity for their
financing needs.

As mentioned above, capital structure decision is also affected by a firms
characteristics. These characteristics are potentially contentious (Titman and Wessels
1988). Each theory ofcapital structure gives the different implication on how the
firms characteristics influence thefirms capital structure choices. In order to identify
which of the firms characteristics that havesignificant effect on capital structure
based on theories in the context of Sri Lankan firms, so thisresearch concentrates on a
group of variables identified in the previous literature. The selectedexplanatory
variables are firm size, profitability, tangibility and growth opportunities.

For profitability, the pecking order theory, based on works by Myers and Majluf
(1984)suggests that firms prefer internal funds rather than external funds. If external
finance is required,the first choice is to issue debt, hybrid, and then eventually equity
as a last resort (Brealey and Myers,1991).

This behavior may be due to the costs of issuing new equity, as a result of
asymmetricinformation or transaction costs. All things being equal, the more
profitable the firms are, the moreinternal financing they will have, and therefore we

should expect a negative relationship betweenleverage and profitability. However,
from the trade-off theory point of view more profitable firmsare exposed to lower
risks of bankruptcy and have greater incentive to employ debt to exploitinterest tax
shields.

For tangibility, according to the pecking order theory and the trade-off theory, a firm
with a large amount of fixed asset can borrow at a relatively lower rate of interest by
providing the security of these assets to the creditors. Having the incentive of getting
debt at a lower interest rate, a firm with a higher percentage of fixed assets is expected
to borrow more as compared to a firm whose cost of borrowing is higher because of
having less fixed assets. Thus, i expect a positive relationship between tangibility of
assets and leverage. From a pecking order theory perspective, firms with few tangible
assets are more sensitive to informational asymmetries. These firms will thus issue
debt rather than equity when they need external financing (Harris and Raviv, 1991),
leading to an expected negative relation between the importance of intangible assets
and leverage.

For size, according to trade-off theory, first, large firms dont consider the direct
bankruptcy costs as an active variable in deciding the level of leverage as these costs
are fixed by constitution and constitute a smaller proportion of the total firms value.
And also, larger firms being more diversified have lesser chances of bankruptcy
(Titman and Wessels 1988). Following this, one may expect a positive relationship
between size and leverage of a firm. According to pecking order theory, Rajan and
Zingales (1995) argue that there is less asymmetrical information about the larger
firms. This reduces the chances of undervaluation of the new equity issue and, thus,
encourages the large firms to use equity financing. This means that there is a negative
relationship between size and leverage of a firm.

For growth, by applying pecking order arguments, growing firms place a greater
demand on the internally generated funds of the firm. Consequentially, firms with a
relatively high growth will tend to issue securities less subject to information
asymmetries, i.e. short-term debt. This should lead to firms with relatively higher
growth having more leverage. Following trade-off theory, for companies with growth
opportunities, the use of debt is limited as in the case of bankruptcy, the value of

growth opportunities will be close to zero, growth opportunities are particular cases of
intangible assets (Myers, 1984; Williamson, 1988 and Harris and Raviv, 1990). Firms
with less growth prospects should use debt because it has a disciplinary role (Jensen,
1986; Stulz, 1990). Firms with growth opportunities may invest sub optimally, and
therefore creditors will be more reluctant to lend for long horizons. This problem can
be solved by short-term financing (Titman and Wessels, 1988) or by convertible
bonds (Jensen and Meckling, 1976; Smith and Warner, 1979). Furthermore, while the
literature is rich in studies that examine the importance of firm specific factors in
determining a firms financing choice, empirical evidence on the effect of capital
structure choice on stock market reaction is limited. When a firm issues, repurchases
or exchanges one security for another, it changes its capital structure. What are the
valuation effects of these changes? There are several theories which explain the
relationship between capital structure and stock price. Based on signaling through
capital structure, as the increased level of leverage is accompanied by a higher risk of
bankruptcy, the increased level of debt indicates the confidence of the management in
the future prospects of the firm. Hence, it carries greater conviction than a mere
announcement of undervaluation of the firm by the management. On the other hand,
an issue of equity is a signal that the firm is overvalued. The market concludes that
the management has decided to offer equity because it is valued higher than its
intrinsic worth by the market. The markets normally react favorably to moderate
increases in leverage and negatively to a fresh issue of equity.

Under the trade-off theory, firms will only take actions if they expect profits. An
implication of the theory is that the market reaction to both equity and debt securities
will be positive. The market response to a leverage change consists of two pieces of
information: the revelation of the information that the firms conditions have changed,
necessitating financing, and the impact of the financing on security valuations. The
information contained in security issuancedecisions could be either bad news or good
news. It might be bad news if the company is issuing securities, because the company
actually needs more resources than anticipated to carry out operations. It would be
good news if the company is issuing securities to take advantage of a promising new
opportunity that was not previously anticipated. A company may also issues securities
to anticipate a change in future needs. This indicates that the trade-off theory by itself
places no apparent limitations on the effect of market valuation of issuing decisions.

Jung et al. (1996) suggest an agency perspective and argue that equity issues by firms
with poor growth prospects reflect agency problems between managers and
shareholders. If this is the case, then stock prices would react negatively to news of
equity issues. The pecking order theory is usually interpreted as predicting that
securities with more adverse selection (equity) will result in more negative market
reaction. Securities with less adverse selection (debt) will result in less negative or no
market reaction. This does of course, still rest on some assumptions about market
anticipations. Literature offers various explanations for buybacks. One of these
explanations has theoretical backgrounds and some are formed from empirical
studies. The undervaluation hypothesis is explaining our hypotheses. Stock
repurchases offer flexibility in the choice to distribute excess funds and when to
distribute these funds. This flexibility in timing is valuable because firms can wait to
repurchase until the stock price is undervalued. The undervaluation hypothesis is
based on the argument that information asymmetry between insiders and shareholders
can cause a company to be disvalued. If insiders trust that the stock is undervalued,
the firm may repurchase stock as a signal to the market or investing in its own stock
and get mispriced shares. This hypothesis implies that the market interprets the action
as an indication that the stock is undervalued (in Dittmar, 1999). Because of the
asymmetric information between managers and shareholders, announcements of share
repurchase are considered to expose private information that managers have about the
value of the company.

The information/signaling hypothesis has three immediate implications: repurchase
announcements should be accompanied by positive price changes; repurchase
announcements should be followed (though not necessarily immediately) by positive
news about profitability or cash flows; and repurchase announcements should be
immediately followed by positive changes in the markets expectation about future
profitability (Gustavo Grullon and RoniMichaely, 2002).

1.2.2. Research Motivation

How do firms finance their operations? What factors influence these choices? How do
these choices affect the stock price? These are important questions that have
motivated the researcher to conduct this research. Based on theories explanation

above, i understand that a firms characteristics cost and benefit, market reaction
influenced the choice of a firms capital structure, and it is important for the manager
of a firm to understand the theory of capital structure. Therehave been many previous
studies which examine one of those factors in influencing the choice of afirms capital
structure; however, there have been few that analyze all factors on the whole
inaffecting the choice of a firms capital structure. Based on that motivation, through
this research, i examine those factors on the choiceof a firms capital structure by
formulating research hypotheses. I examine all the followingissues, the determinants
of capital structure of the firms in Sri Lanka; study how firms inall 20 sectors raise
capital for investments. The main motivation of this study is to identify the
determinants of capital structure of Sri Lankan listed companies in the light of the
Static Trade off theory, Pecking Order theory and Agency Cost theory.

This theory is based on asymmetric information between investors and firm managers.
Due to the valuation discount that less-informed investors apply to newly issued
securities, firms resort to internal funds first, then debt and equity last to satisfy their
financing needs.

1.3 Problem Identification

In order to keep developing, the firms in all sectors need to finance their financial
deficit or even new projects; hence it is important to firms to implement the theories
of capitalstructure described earlier in choosing carefully their capital structure for
financing theinvestment.

Firm managers can consider the cost and benefit of each capital structure preferences
based on the theories as each preference will affect market reaction which is reflected
by the firmsstock price valued by the market and the firms life cycle which
influences the choice of the firms capital structure.

1.4 Research Questions

Research questions are as follow:

1. What are the factors effecting capital structure decision of listed companies in Sri
Lanka?

a. As in the pecking order hypothesis, does the firms profitability have a
negativerelationship with the level of leverage? And as implied by the trade-
off theory, does thefirms profitability have a positive relationship with the
leverage?

b.As suggested by the trade-off theory, does size have a positive relationship
with the leverage? And as suggested by the pecking order theory of the capital
structure, isthere a negative relationship between the leverage and the size of
the firm?

c.In accordance with the trade-off theory, is there a positive relationship
between theasset tangibility and the leverage? And market timing theory
prediction as negative relationship between leverage and tangibility of asset is
true?

d.As implied by the packing order theory do growth opportunities have a
positive relationship with the leverage? As implied by tradeoff theory do
growth opportunities have negative relationship?

2. Do profitability, size, tangibility and growth have impact on leverage

1.5 Research Objectives

Based on research questions, the objectives of this research are to:

1. Determine the factors affecting capital structure decisions in SriLankan listed
companies

a. Examine the relationship between a firms profitability and debt ratios as
implied bythe trade-off theory and the pecking order theory.

b. Investigate the relationship between size and debt ratios as suggested by the
trade-offtheory and the pecking order theory.

c. Analyze the relationship between asset tangibility and debt ratios as implied
by thetrade-off theory and market timing theory.

d.Investigate the relationship between growth and debt ratios as implied by the

2. Try to examine the impaction of profitability, size, tangibility and size on leverage

1.6 Hypothesis and Conceptual framework

1.6.1 Hypothesis

In line with the theoretical framework and prior empirical investigations, I have
developed my hypotheses.

H1a:Trade-offtheorysuggestspositiverelationshipbetweenprofitabilityandleverage.
H1b:Peckingorder theoryexpectsnegativerelationship
betweenleverageandprofitability.

H2a: Trade-off theory explains positive relation between size and leverage.
H2b:Peckingordertheorydepictsnegativerelationshipbetweensizeandleverage.

H3a:Trade-offtheorypredictspositiverelationshipbetweentangibilityandleverage.

H3b:Markettimingtheorypredictsnegativerelationshipbetweentangibilityandleverageif
firmshavemoretangibleassetsandissuemore equity.

H4a:Peckingordertheoryforecastspositiverelationshipbetweengrowthandleverage.
H4b:Trade-offtheoryexpectsnegativerelationshipbetweengrowthandleverage.

H5: There is significance impact of profitability, tangibility, size and growth on
leverage.

1.6.2. Conceptual framework

Through the theoretical frameworks and previous empirical studies I have constructed
the following conceptual framework for dependent and independent variables of this
study.

Table1
Dependent&IndependentVariablesandtheirDefinitions
Determinants Definition Theoretical predicted
sign
Dependent variable
Leverage Share holders fund
divided by outsiders fund
+ or -
Independent variable
Profitability Pretax profit divided by
total assets

+ or -
Size Natural logarithm of sales + or -
Tangibility Fixed assets divided by
total assets
+
Growth Growth of total assets + or -
Source: Author Constructed
1.7 Signification of the Study

The signification of the study is to investigate the factors affecting the capital
structure decisions of the firms in all 20 sectors in Sri Lanka which are listed in CSE,

examine how firms raise capital for investments, internally or externally (with debt,
equity, or debt to repurchase equity), companies that exist throughout the 5-years
period with no missing data are included in the study. Data availability is a major
limitation in capital structure studies in emerging capital markets. I use data of
Colombo Stock Exchange listed companies in all 20 sectors, with the selected time
period of 2009-20013

1.8 Methodology

1.8.1 Data Source

The present study used secondary data for the analysis. The data utilized in this study
is extracted from the comprehensive income statements and financial position of the
sample tradingcompanies quoted in Colombo Stock Exchange (CSE) database. In
addition to this, scholarly articles from academic journals and relevant text books
were also used.

1.8.2 Sample design

Sampling design is a definite plan for obtaining a sample from a given population. It
refers to the technique or the procedure the researcher would adopt on selecting items
for the sample (Kothari, C.R., 2004). The sample of this study is confined to all 20
sectors 40 companies (each sector I choose 2 companies) which are listed in the
Colombo Stock Exchange (CSE).

1.8.3 Mode of Analyze

In the present study, i analyze my data by employing correlation; multiple regressions
& descriptive statistics. For the study, entire analysis is done by personal computer. A
well-known statistical package Statistical Package for Social Sciences (SPSS) 17.0
Version was use in order to analyze the data. The following leverage and profitability
ratios are taken into accounts which are given below.

Table-1.1: Calculations of dependent and independent variables

Determinants Calculation
Dependent variable
Leverage Share holders fund /outsiders fund
Independent variable
Profitability Pretax profit / total assets

Size Lg sales
Tangibility Fixed assets /total assets
Growth (Current year total assets previous year total
assets) / current year total assets
Source Author constructed by referring previous empirical studies

In order to derive the existing relationship between dependent and set of independent
variables taken in the study a typical procedure of multiple regressions is undertaken.
Capital Structure is dependent variable and is associated with number of independent
variables to study what actually determines the capital structure of an organization.
The following equation is formulated for the study.

Z=0+1X1+2X2+nXn+
Where,Z=RegressionScore
0=Regressionconstant
1=RegressionCoefficient
Inordertoderivetheexistingrelationshipbetween X1-----Xnare the
independent variables
=errorterm
1.9 Limitation of the Study

The study suffers from certain limitations which are mentioned below.

1. As the study is purely based on listed companies, so the results of the study are
only indicative and not conclusive.

2. Furthermore, data representing the period of 5 years were used for the study. In
addition, the findings of this study imply areas that need further study. The scope of
this study covers the operations of only companies listed in Colombo Stock Exchange
for the period of five years. Giving enough time and resources it is possible to attempt
to study some other private companies in Sri Lanka over a long period of time and
using different statistical methods in order to have a more comprehensive result. The
analyses and findings this study show that there are other factors than the independent
variables used for this study that affect leverage. Research could be conducted to
identify those other factors so as determine the capital structure.

1.10 Organization of the study

This dissertation is organized into five chapters. In the next chapter (chapter 2), I will
provide a detailed literature review on capital structure. It contains both studies on
existing theories of capital structure and empirical research on Firms capital structure
decisions.

Chapter three is the research methodology which discusses the proposed determinants
proxies and measurement. Also, data description and the research model will be
presented in the later part of this chapter.

In chapter four, i interpret my statistical results and some further issues regarding the
research are discussed.

Chapter five is the conclusion to a summary of study; in later part of this chapter some
recommendations will be suggested.

FIGURE 1.1

CHAPTER 02
CHAPTER 01

INDRODUCTION
CHAPTER 02
LITERATURE
CHAPTER 03
METHODOLOGY
CHAPETER 04
DATA PRESENTATION &
ANALYZE
CHAPTER 05
CONCLUTION AND
RECOMMENDATIO

LITERATURE REVIEW

2.1Chapter Objective
In order to determine and discuss the Factors Affecting Capital Structure decision in
Srilankan listed Companies this chapter presents the relevant capital structure theories
and their implication and earlier empirical results are examined and discussed and
together with the capital structure theories, they provide the foundation of the
analysis.

The puzzle introduced by Modigliani and Miller in their paper in 1958 has been
challenging the economists, scholars and researcher to solve it. While struggling to
answer the question posed by Modigliani and Miller,researchers gave many theories
unfortunately researchers have not agreed upon one satisfactory answer. Therefore the
aims of this chapter are: firstly, to explain the main theories that contribute a lot in the
literature of capital structure. Secondly, to determine what does each theory predict?
Thirdly, to compare empirical evidence from all around the world with predictions of
these theories those validate or reject each of them.

2.2 Defining the Capital Structure

Capital structure constitutes the core element in this dissertation it is suitable to define
what the concept of capital structure actually is. Different definitions have been used
in the capital structure literature. Brealey, Myers, & Marcus (2009, p. 366) defines
capital structure as the mix of long-term debt and equity financing. However, as
capital structure relates to the way that companies finance their assets it is inadequate
only to include long term debt and equity in the capital structure definition, as they
can just as readily issue short term debt or convertible debt to provide financing. The
choice will ultimately relate to company preferences, as well as the nature of the asset
being financed. Similarly, Welch (2011) challenges the use of only including financial
debt and equity into the capital structure measure and advances instead a measure
including total liabilities to total assets. Using this leverage measure indicates that
capital structure consists of all liabilities, both financial and non-financial, and equity.
For the purpose of the literature review and the capital structure theories treated it is
sufficient to use a definition of capital structure between the two above mentioned. As

such capital structure is defined as the mix of financial debt, including long- and
short-term debt and convertible debt, and equity. This definition is able to capture the
implications of the capital structure theories examined in the following sections.

2.3 Capital Structure Theories

2.3.1 Modigliani and Miller Theory

Capital Structure Theory, as known today, originates from the work of Modigliani and
Miller, hereafter named MM, who published their famous article in 1958. Many, if
not all business and finance academics have heard and know about MMs capital
structure irrelevance proposition and several textbooks within corporate finance begin
their explanations of capital structure and cost of capital with the work of MM. (Berk
& DeMarzo, 2011; Brealey, et al., 2009; Hillier, et al., 2008) Basically, the main
finding by MM was that, given a set of assumptions, the cost of capital and the value
of a given company were independent of the financing choice, also known as the debt
irrelevancy theorem.

Modigliani and Miller suggest that the composition of the capital structure is an
irrelevant that companies have the optimal capital structure. In Modigliani and Miller
(1958) The Cost of Capital, Corporation Finance and the Theory of Investment, they
have strengthened the net operating income approach by adding a behavioral
dimension to it. They have been awarded the Nobel Prizes (Franco Modigliani in
1985, and Merton Miller in 1990) for their widely recognized contributions to
financial theory.

In Van Horne (1998), the Modigliani-Miller (MM) position is based on the following
assumptions: (1) the fundamental building blocks for the hypothesis of MM is a
perfect capital market. There is a free flow of information in the market that can easily
be accessed by investors. There are no costs involved in obtaining the information. (2)
Securities issued and traded in the market are infinitely divisible. (3) No transaction
costs such as flotation costs, underpricing major issues, brokers, transfer taxes, etc. (4)
All participants in the market are rational that they are trying to maximize profits or
minimize their losses. (5) All investors have homogeneous expectations about future

earnings of all firms in the market. (6) The company can be classified into the class
`equivalent return '. Firms in each class have the exact same profile of business risk.
So the company can be taken as perfect substitutes for one another. All companies in
a particular class have a common level of capitalization rate. (7) There is no corporate
tax. Modigliani and Miller (1958) have stated the arbitration process to support their
position that the value of the company with leverage cannot be higher than the value
of a company with no leverage. On the other hand, the value of a company with no
leverage cannot be higher than the value of a company with leverage. The substance
of this argument is that investors can replicate any combination of capital structure by
substituting the company leverage with the home-made leverage. Home-made
leverage refers to individual loans prepared by investors in the equivalent ratio as the
company with leverage. Therefore, leverage of company is not something that is
distinctive that investors cannot carry out it alone. Therefore, the leverage in the
capital structure has no importance in a perfect capital market. It implies that, firms
that are identical in all respects, except for their capital structure, must have the equal
value. In the event that they have a different valuation, the arbitration process will
initiate. This will maintain to occur until the two companies command the same
valuations. At this position, the market reaches equilibrium or stability.

The conclusions by MM, which was a break with the conventional view on corporate
finance at the time, triggered much debate and criticism and countless articles were
published on the subject in the following periods. Durand was one of the first to
express criticism of the work of MM. (Durand, 1959) His criticism dealt primarily
with the assumptions underlying the MM propositions and stated that in the real world
the conclusions that MM arrive at were faulty at best. Durands comments highlighted
the major stream of thoughts by critics, as most discussed the problems resulting from
MMs strong assumptions that would never resemble the real circumstances that
companies and investors were operating in. Especially the assumption concerning
perfect markets or no market imperfections are a strong assumption, as this excludes
taxes, bankruptcy costs, agency costs etc. and requires that all information is reflected
in the market immediately and that all participants in the market have equal access to
act on the information. However, despite the criticism of MMs framework and
propositions their work still stands as a cornerstone of corporate finance. The reason
for this is that they with their model and propositions from 1958 provided the area of

corporate finance with a tool to systematically analyze the factors influencing the
effect of capital structure choices. By assuming perfect markets and thereby excluding
factors such as taxes, bankruptcy costs, asymmetric information, agency costs etc.,
they essentially highlighted which factors made capital structure relevant. The
assumptions could then be tested systematically in a structured way and this
facilitated the development of several theories of capital structure.

2.3.2 Trade-Off Theory

The major benefit of debt financing is that it provides a tax shelter that increases the
available remaining to be distributed to shareholders of equity. Nevertheless, the
maindisadvantage related with debt financing is the risk of bankruptcy (Warner, 1977;
Haugen andSenbet, 1978, Andrade and Kaplan, 1998). Increased levels of leverage,
while resulting in theavailability of a larger tax shields also necessitate a higher cost
line of financial distress. Thecompany is trying to trade-off between the size of the tax
shelter and financial distress costs.Higher probability of financial distress is in terms
of start-ups and high growth businesses. Thecompany is exposed to the risk of
uncertain cash flow streams and low tangible asset base.Therefore, these type of
companies should not place high confidence on the debt in their capitalstructure. On
the other hand, firms with a stable revenue stream and sound asset base facing alower
risk of bankruptcy. This company can apply a moderately higher level of leverage in
theircapital structure.

Taking modern corporate finance theory into consideration, the existing views prior to
MMs proposition in regards to cost of capital and optimal capital structure, does
notseem far from what is taught to many academics today. However, the difference
shouldbe found in the factors causing the changes in the average cost of capital and
the valueof the company, where the positive effect on firm value and cost of capital
stems fromthe tax advantage of including debt into the companys capital structure
and themitigating effect of interest payments on the agency costs arising from the free
cash
flowproblem.(Jensen,1986)However,anincreaseinleveragecausesincreasedriskoffinanc
ialdistress and bankruptcy costs so the benefits from debt should be measuredagainst
the potential costs associated with debt. This is the essence of the trade-offtheory. The

fact that debt has a positive effect on firm valuation and cost of capital was already
discussed by MM, but the authors end up concluding that;

with a corporate income tax under which interest is a deductible expense, gains
can accrue to stockholders from having debt in the capital structure, even when
capital markets are perfect. The gains however are small (Modigliani &
Miller, 1958, p. 294:5)

According to MM in their original article the benefits of including debt into the
capital structure was insignificant. However, MM (1963) corrects their initial
conclusion on the advantage of debt when interests are tax deductible at the corporate
tax rate, and states that the value of including debt into the capital structure is higher
than their original paper suggested. The value of a levered company is equal to the
value of thecompany unlevered plus the present value of the interest tax
shield,(Modigliani & Miller, 1963, p. 436).

Critically though, MM (1963) omits any notion on the potential costs involved with
increased debt, which has the consequence that in their corrected model companies
would gain by increasing their leverage as much as possible, as high as full debt
financing. Miller (1977) argues that the cost of bankruptcy is very low compared to
the advantage of debt and induces that if the tax advantage when considering both
personal and corporate taxes was of high value, there should be higher changes in
capital structures over periods with changes in tax rates. (Miller, 1977) In his paper
Miller contradicts the findings and statements developed by Baxter (1967) and Kraus
and Litzenberger (1973), amongst others. Baxter (1967) focuses on the costs
associated with bankruptcy costs and the effect it has on the cost of capital. Baxter
notes that the cost of capital decreases with low to moderate levels of debt, but rises
quickly when the debt equity ratio becomes so high that there is an increasing risk the
company defaults and suffer the associated direct and indirect costs. Direct costs are
often associated with the legal and administrative cost incurred when the company
defaults. Indirect costs, however, are more broad and not as easily determined nor
measured. They extend over a wide variety of costs, such as losses on operating sales
due to mistrust from customers, loss of credit availability from suppliers, inability to
keep or attract employees etc. These costs suggests a convex function of cost of

capital with different levels of debt-equity ratios similar to the existing views, prior to
MMs irrelevance theorem, and similar to the present perception of the cost of capital
or weighted average cost of capital, WACC, as it is more generally known as.

2.3.2.1 Static Trade-Off Theory

The trade-off model deals with the benefits and costs associated with the issuance of
debt. The model is often traced back to Krauss and Litzenberger (1973) who
developeda single period company valuation model that took into account both the
value of the taxadvantage to debt and the potential bankruptcy costs. According to
Kraus and Litzenberger (1973) the value of a levered company can be divided into
threecomponents; the value of the company unlevered, the benefits from the tax
advantage ofdebt and finally, the after tax costs

of bankruptcy. Seeing that the value of a leveredcompany consist of these three
components, where the unlevered value of the companyis one, it suggest that
companies can increase the value of the levered company bybalancing the last two
component, the tax advantage and the cost of bankruptcy. This indicate that there for a
given company is an optimal capital structure where companiescan increase the value
of the company by issuing more debt until it reaches a pointwhere the tax advantage
of issuing more debt is offset by an increase in bankruptcycosts.The model as
presented by Kraus &Litzenberger (1973) and Myers (1984) suggest thatcompanies
will always be at their optimal debt-equity ratio. This constant debt-equityequilibrium
would imply that companies would change their capital structure whenevertheir
market values of equity were subject to sudden changes or shocks. Realisticallythis
seems unlikely as issuance or repurchasing of debt or equity will inevitably
beassociated with transaction costs and it is therefore more likely that companies
adjusttheir capital structures only infrequently, reflecting the imposed transaction
costs. Thesetransaction costs is not mentioned in the original model developed by
Kraus andLitzenberger but Myers (1984) mentions such costs as a possible
explanation whycapital structure changes didnt occur as often as the static trade-off
model wouldpredict.

The model is, as previously mentioned, a one period model so that it deals with a
companys capital structure in isolation of all other periods. This static approach to
modeling a companys capital structure is flawed as companies operate over several
periods. Each periods capital structure will inevitably be, at least partly, correlated
with the preceding periods capital structure and companies are likely to take into
account future expectations when deciding on capital structure in one period.
Numerous empirical examinations of determinants of capital structure have been
conducted the last two-three decades and have resulted in a number of stylized
findings of the relationship between a companys leverage ratio and certain firm
characteristics.1

One of the most consistent findings in empirical capital structure research is that
higher profitability is associated with lower leverage for a given company, a result
that is inconsistent with the static trade-off theory, as it posits that higher profitability
would increase leverage to take advantage of a higher interest tax shield.

(Fama&French, 2002) Furthermore, the static nature of the model suggests that
companies are always at their optimal capital structure meaning that they adjust to
sudden changes immediately, which is also inconsistent with empirical results.
(Flannery &Rangan, 2006)
The inconsistencies between the empirical results and the static trade-off theory
combined the inadequacy of static models to analyze companies that operate in
dynamic, multi-period settings have led to the development of dynamic trade-off
theories that yield promising results.

2.3.2.2 Dynamic TradeOff Theory

Dynamic trade-off theory can be traced back to Fischer, Heinkel and Zechner (1989),
FHZ, who was one of the first to develop a model in which companies may
deviatefrom their optimal capital structure. The increasing dissatisfaction with the
static tradeoffmodel has led to many contributions to dynamic trade-off theory since
the FHZspaper, especially within the last ten years. Dynamic trade-off theory treats
companiescapital structure as a continuous decision that involves consideration not
only of thetrade-off between the tax advantage of debt and potential cost of financial
distress, butalso about investment decisions and restructuring costs. In contrast to the
static trade-offmodel, costs associated with adjusting capital structure may cause
companies to moveaway from their optimal capital structure for longer periods of
time.

Fischer, Heinkel and Zechner (1989) developed a model in which they suggested that
instead of an optimal capital structure companies have an optimal capital structure
range in which they let the capital structure fluctuate. The basic idea is that companies
do not adjust their capital structure immediately when sudden changes in their asset
values occur. Instead companies let their capital structure vary within a range as the
costs of adjusting within this range exceed the benefits of doing so. Only at company
specific upper and lower debt-equity ratios is it advantageous for companies to adjust
their capital structure.

Fischer, Heinkel and Zechner offers an appealing multi-period dynamic perspective to
the financial decisions made in companies, but doesnt offer much perspective on

what implications it might have to empirical research. Strebulaev (2007) developed a
dynamic trade-off model that incorporates costs associated with capital structure
adjustments and shows by simulation that the model generates results that are
consistent with observed capital structures. An important part of Strebulaevs findings
are the distinction between companies capital structure at refinancing points and their
actual capital structure when data is collected. Similar to FHZ, Strebulaev argue that
due to adjustment costs companies will only be at their optimal capital structures
when they reach their individual refinancing points. When examining a cross section
of companies It is therefore unlikely that the companies are at their refinancing points
when the data is collected, and furthermore each company will be at different
distances away from their optimal capital structures, which makes cross-section
analysis using static models inaccurate and may lead to wrong conclusions. An
example of this is the negative relationship between profitability and leverage that has
been interpreted by many researchers, using static models, as a confirmation of
pecking order behavior and hence a rejection of the trade-off theory. 4 However,
Strebulaev (2007) shows how a dynamic trade-off model can explain this relationship.
When companies experience an increase in profitability it will have a positive effect
on company value as the expectation of future profitability improves, however,
companies will not adjust immediately due to adjustment costs so the leverage ratio
increases.5

The models developed by FHZ and Strebulaev offer appealing characteristics, but the
models look only at costs associated with the act of adjusting the capital structure and
treats companies investment decisions as exogenous and independent of their
financing choice, which is a seemingly strong assumption, e.g. companies likely take
future investment decisions into consideration when deciding on present financing
decisions.

Other researchers have developed alternative dynamic models that include more
factors in their models such as investment decisions. Hennessy and Whited (2005)
developed a model that combines companies investment decisions with their
financing decisions in a continuous framework. In their dynamic model companies
make investment and financing decisions jointly every period, which implies that
companies are always at a restructuring point or refinancing point, cf.

Strebulaev(2007). A debatable finding of Hennessy and Whiteds is that companies
do not have a target capital structure but leverage being a result of a given companys
earlier results and their expectations for the future capital structure and at which speed
companies adjust towards their capital structure target.

2.3.3 Packing Order Theory

This theory has long roots in the descriptive literature, and it was clearly articulated
by Myers (1984). Suppose that there are three sources of funding available to firms -
retained earnings, debt, and equity. Equity is subject to serious adverse selection, debt
has only minor adverse selection problems, and retained earnings avoid the problem.
From the point of view of an outsideinvestor, equity is strictly riskier than debt. Both
have an adverse selection risk premium, but that premium is larger on equity.
Therefore, an outside investor will demand a higher rate of return on equity than on
debt. From the perspective of those inside the firm, retained earnings are a better
source of funds than debt is, and thus, debt is a better deal than equity financing.
Accordingly, retained earnings are used when possible. If there is an inadequate
amount of retained earnings, then debt financing will be used. Only in extreme
circumstances is equity used. This is a theory of leverage in which there is no notion
of an optimal leverage ratio. Observed leverage is simply the sum of past events.
Tests of the pecking order hypothesis include Shyam-Sunder and Myers (1999), Fama
and French (2002) and Frank and Goyal (2003).

Pecking order theory predicts that more profitable firms will have less leverage. The
signs on firm size variables are ambiguous. On the one hand, larger firms might have
more assets in place and thus a greater damage is inflicted by adverse selection as in
Myers and Majluf (1984). On theother hand, larger firms might have less asymmetric
information and thus will suffer less damageby adverse selection as suggested by
Fama and French (2002). If sales are more closely connected to profits than just to
size, then one might be inclined to expect a negative coefficient on log sales.

Capital expenditures represent outflows and they directly increase the financing
deficit asdiscussed in Shyam-Sunder and Myers (1999). Capital expenditures should,
therefore, be positively related to debt under the pecking order theory.

R&Dexpenditures also increase the financing deficit. In addition, R&D expenditures
are particularly prone to adverse selection problems. Thus, the prediction is that R&D
is positively related to leverage.

Like capital expenditures, dividends are part of the financing deficit (see Shyam-
Sunder and Myers, 1999). It is therefore expected that a dividend-paying firm will use
more debt. A credit rating involves a process of information revelation by the rating
agency. Thus, a firm with an investment grade debt rating has less adverse selection
problem. Accordingly, firms with such ratings should use less debt and more equity.
Finally we might expect that firms with volatile stocks are firms about which beliefs
are quite volatile. It seems plausible that such firms suffer more from adverse
selection. If so, then such firms would have higher leverage.
An increase in the Treasury bill rate should have no effect as long as the firm has not
yet reached its debt capacity. However, the debt capacity might be a decreasing
function of the interest rate since more cash is needed to pay for a given level of
borrowing when the interest rate rises. When a firm reaches its debt capacity, it is
supposed to turn to more expensive equity financing under the pecking order theory.
Thus, interest rate increases will tend to reduce leverage under the pecking order
theory.

2.3.4 Market Timing Theory

As discussed by Myers (1984), market timing is a relatively old idea. In surveys, such
as byGraham and Harvey (2001), managers continue to offer at least some support for
the idea. Consistent with the market timing behavior, Hovakimian, Opler and Titman
(2001) show that firms tend to issue equity after the value of their stock has increased.
Lucas and MacDonald (1990) analyze a dynamic adverse selection model that
combines elements of the pecking order with the market timing idea. Baker and
Wurgler (2002) argue that corporate finance is best understood as the cumulative
effect of past attempts to time the market.

The basic idea is that managers look at current conditions in both debt markets and
equity markets. If they need financing, then they will use whichever market looks
more favorable currently. If neither market looks favorable, then fund raising may be

deferred. Alternatively, if current conditions look unusually favorable, funds may be
raised even if they are not currently required.

This idea seems quite plausible. However, it has nothing to say about most of the
factors that are traditionally considered in studies of corporate leverage. It does
suggest that if the equity market has been relatively favorable, then firms will tend to
issue more equity. It also suggests that if the debt market conditions are relatively
unfavorable with high Treasury bill rates, then firms will tend to reduce their use of
debt financing. In a recession, firms presumably tend to become more leveraged.

2.4 Factors Affecting Capital Structure Decision

The Capital Structure theories above mentioned and empirical evidence from the
previous studies predict the Factors such as Profitability, Size, Tangibility, and
Growth are mainly influence in capital Structure decision.
The hypothesized relationships between these firm-specific characteristics
(profitability, size, tangibility and growth) and leverage are based on groundings in
theory

Fourofthesefactors,namelyfirmsize,assettangibility,
profitabilityandgrowthhavebeenidentifiedbyRajanandZingales(1995)andFrankandGo
yal(2007)asbeingthemostreliabledeterminants
1

After reviewing the Capital Structure theories, researcher tests the theories by using
selected variables (accordance with by Rajan and Zingales (1995) and Frank and
Goyal (2007)). As research question that stated in chapter 1, what are the Factors
affecting capital structure of the firms in the listed companies in SriLankan stock
exchange?

Hence, the trade-off theory and the pecking order theory, do growth opportunities
have positive relationship with Leverage?; As the pecking orderhypothesis, does
firms profitability has a negative relationship with Leverage? And as impliedby the
trade-off theory, does firms profitability has a positive relationship with Leverage?
As suggested by the trade-off theory, does sizehas a positive relationship

withLeverage? And as suggested by the pecking order theory of thecapital structure,
is there a negative relationship between Leverage and size of the firm? Inaccordance
with the trade-off theory, is there a positive relationship between asset tangibility
andLeverage?

Therefore, the relevant variables researcher used are: Leverage as the dependent
variable, and the growth opportunities, profitability, size, and tangibility as the
independent variables. The selection of independent variables is also conducted by
previous empirical studies such as Pandey(2001), Sogorb-Mira and Lpez-Gracia
(2003), and Huang and Song (2002).

The test of factors affecting capital structure decisions of the firms listed in Colombo
stock exchange Srilanka is important as these firms have different characteristics.
Researcher tests it based on pecking order theory and trade-off theory following Dr.
AnuragPahuja and AnuSahi in their research on Factors Affecting capital Structure
decisions evidence from indian firms (2010).

1
FrankandGoyal(2007)alsofindindustrymeanleveragetobeareliabledeterminantofcapitalstructure.How
ever,Researcherexcludesthisfromanalysisasresearcherintroducesindustryfixedeffectsinanalysistocontr
olforinherentvariationacrossindustries.
The following are the variables which affecting capital structure decision predicted
from capital structure theories and previous empirical studies.

2.4.1 Leverage

Several alternative definitions of leverage have been used in the previous studies.
Most studies consider some form of a debt ratio. These differ according to whether
book measures or market values are used. They also differ in whether all debt or only
long term debt is considered. Some authors prefer to consider the interest coverage
ratio instead of a debt ratio. Finally, a range of more detailed adjustments can be
made.

Book ratios are conceptually different from market ratios. Market values are
determined by looking forward in time. Book values are determined by accounting for

what has already taken place. In other words book values are generally backward-
looking measures. As pointed out by Barclay, Morellec and Smith (2001), there is no
inherent reason why a forward-looking measure should be the same as a backward-
looking measure.

The older academic literature has tended to focus on book debt ratios. The more
recent academic literature tends to focus on market debt ratios. Some argue that
theories are really about long-term debt, while short-term debt is merely an
operational issue. Yet another approach that also has its advocates (Welch, 2002) is to
focus on the interest coverage ratio instead of looking at debt ratios.

MyersandMajluf(1984)proposeapositiverelationbetweenthecollateralvalueofassetsandl
everage.They arguethatfirmsmaybebetter-
offsellingsecureddebtasmeanstoreduceinformationasymmetries.AccordingtoDeAngloa
ndMasulis(1980),firmshavinglargenon-
debttaxshieldswillhaveareducedincentivetobenefitfromthetaxadvantageofdebt.Conseq
uentlytheywouldundertakelessleverage.Firmshavinghighamountsofdebtarelikelytofore
goprofitableinvestmentopportunities(Myers,1977).Therefore,firmsexpectinghighfuture
growthwillbemotivatedtoissueequitytofinancetheirprojects.Similarly,firmsofferinguniq
ueproductsfacehighercostsofbankruptcyintheeventofliquidation(Titman,1988).Thisisd
uetothespecializedskillsandneedsoftheemployeesandcustomersrespectivelythatcannotb
eduplicatedeasily.Hence,suchfirmswouldbeexpectedtohavelowerleverage.Buildingont
othishypothesis,Titman(1988)arguesthatmanufacturingfirmsshouldhavelowerleveragec
omparedtospecializedindustryfirms.Likewise,largerfirmsareabletoundertakehigherleve
rageastheytendtobemorediversifiedandhence,facelowerbankruptcyrisks(Ang,Chuaand
McConnell,1982;Warner,1977).Firmswithmorevolatileearningsalsohavelessincentivet
ohavehighdebtlevelsduetolimitedtaxadvantageofdebt(DeloofandVerschueren,1998).La
st,inlinewiththePeckingOrdertheory,theliteraturesuggeststhatprofitablefirmswillutilizei
nternalfunds and thus have lower leverage (Myers,1984;Donaldson,1961).
IntheirsurveyofEuropeanfirms,BancelandMittoo(2011)findthatthatfinancialflexibility
,creditratingsandtaxadvantagesofdebtarethemostimportantfactorsshapingthe debt
policyoffirms.Moreover,the level ofinterest ratesand sharepriceare
consideredintimingthedebtandequityissues.Anenormousamountofliteraturehasbeende

votedto
empiricallytestthedeterminantsofcapitalstructure.Theresultssuggestsignificantdepartur
esfrom theoryinpractice.

TitmanandWessels(1988)findthatuniquenessandprofitabilityoffirmsarenegativelyrelat
edtothedebtlevels.However,
theyfindnoevidencebetweentherelationshipofleverageandfirmsexpectedgrowth,non-
debttaxshields,collateralvalueofassetsandearningsvolatility.On
theotherhand,HarrisandRaviv (1991) performasurveyandfind thatleverageis
positivelycorrelatedtofirm size,assettangibility,non-debt taxshields
andinvestmentopportunitiesbutnegativelyrelatedtobankruptcyriskanduniqueness.Raja
nandZingales(1995)reportthatleverageispositivelycorrelatedwithsizeandassettangibilit
ybutnegativelycorrelatedwithprofitabilityandgrowth.

2.4.2. Profitability

TherelationshipbetweenprofitabilityandleverageisthemostcriticalmeansoftestingthePe
ckingOrdertheoryproposedbyMyersandMajluf(1984).Accordingtothistheory,firmsfoll
owafinancinghierarchy.Inanenvironmentcharacterizedbyinformationasymmetry,itisco
stlytoissueasecurityaboutwhichoutsideinvestorshavelittleinformation.Thus,internalfin
ancingisthecheapestmeansoffundingprojects.Asdebt-
holdershaveahigherclaimonfirmassetsascomparedtoequity-
holdersandtheyreceiveregularstreamsofinterestpayments,debtsufferslessfrominformati
onasymmetryascomparedtoequity.

Henceindecidingthesourcesoffinancing,firmswillpreferinternalfundstodebtanddebttoe
quity.ThePeckingOrdertheorysuggeststhatprofitablefirmswillhavelowerleverageasthe
ywillprimarilymeettheirfinancingneedsthroughretainedearnings.Also,cashflowrichfir
msmaysufferfromtheagencyproblemsoffreecashflowsasproposedbyJensen(1986).
Managersmayexpropriateprivatebenefitscreatingaconflictofinterestbetweenthemanage
rsandtheshareholders.Leverage
maytherebybeincreasedtodisciplinethemanagersandlimittheirconsumptionorperquisit

es.Thispredictsanegativerelationshipbetweenleverage and profitability.
However, it may be the case that lenders may be more willing to lend to profitable
firms. If so, more profitable firms would have greater access to debt markets.
Moreover, profitable firms would more likely be able to benefit from greater tax
advantages of debt. This might induce them to be more levered as dictated by the
Trade-off theory. Also, Schoubben and Hulle (2004) suggest that profitable firms may
be less inclined to take debt in an attempt to reinstate their profitability as a signal of
high quality. Titman and Wessels (1988) and Rajan and Zingales (1995) report a
negative relationship between leverage and profitability.
2.4.3 Tangibility

The typeofassetsownedbyafirmmaymotivatethefinancing behaviour of
firms.MyersandMajluf(1984)proposeapositiverelationbetweenthecollateralvalueofass
etsandleverage.Theyarguethatfirmsmaybebetter-
offsellingsecureddebtasmeanstoreduceinformationasymmetries.Itmaybemorecostlyfo
rfirmstosellasecurityaboutwhichoutsideinvestorshavelittleinformation.Likewise,Scott
(1977)hasproposedthatfirmsmayincreasethevalueoftheirequitybyissuingsecureddebt.
Extendingthisargument,GalaiandMasulis(1976)suggestthatifdebtiscollateralized,borro
wersareconstrainedtousethefundsforaspecificprojectonly.

Sincenosuchrestrictioncanbeenforcedinthecaseofunsecureddebt,lendersmaynegotiate
morecostlytermsofdebtfinancing.Thismayleadfirmstoissueequityratherthandebt.Rajan
andZingales(1995)suggestthatthecollateralvalueofassetsshouldserve
toreducetheagencycostsofdebtandequitysuchasriskshifting.Lenderswouldthusbemore
willingto provide credit to firms havinghigh asset tangibility.

Onthecontrary,GrossmanandHart(1982)proposeleveragetobenegativelycorrelatedwith
assettangibilityinlinewiththeagencytheory.Higherlevelsofdebtcanbeundertakentoalign
theinterestsofthemanagersandtheshareholders.Higherleveragewouldinducehigherbank
ruptcycostsandthuslimittheexpropriationofprivatebenefitsbymanagers.GrossmanandH
art(1982)arguethatagencycostsmaybehigherforfirmshavinglowercollateralizableassets

asitismore
difficulttomonitorthecapitaloutlayofsuchfirms.Itmaythusbethecasethatfirmswithlowc
ollateralvalueofassetsmaybemoreleveredinanattempttodisciplinemanagers.Previouse
mpiricalstudies,suchasRajanandZingales(1995)andHarrisandRaviv(1991),havegenera
llyreportedapositiverelationshipbetweenassettangibilityandleverage.

2.4.4 Size

Angetal.(1982)suggestthatthereisaninverserelationbetweenbankruptcycostsasaportion
offirmvalueandfirmvalueitself.Theystatethatdirectbankruptcycostsappeartoconstitute
alargerproportionoffirmvalueasthatvaluedecreases.Also,itappearsthatlargerfirmsfacel
owerbankruptcycostsastheytendtobemorediversified(TitmanandWessels,1988).

Hence,inlinewiththetrade-
offtheory,largerfirmsmaybemoreleveredastheyhavelowercostsoffinancialdistress.Raja
nandZingales(1995)reportleveragetobepositivelycorrelatedtofirmsizeforallG-
7countriesexceptGermanywhichshowsanegativerelationship.DeloofandVerschueren(
1998)alsoconcludesizetobepositivelyreported to leveragebut this relationship does
not holdwhenconsideringshort-term debt only.

However, some other studies have also shown that due to higher information
asymmetries, the cost of issuing equity for small firms is relatively high (Smith, 1977).
Rajan and Zingales (1995) suggest that information asymmetry between the inside
managers and external capital markets is less in larger firms. Thus the cost of equity
should correspondingly be lower for larger firms and hence a preferred medium of
financing. Issuance costs maybe another consideration when deciding between
different sources of external capital. These costs may be a major deterrent for small
firms to tap equity markets (Schoubben and Hulle, 2004). They may therefore issue
debt to reduce these issuance costs. The latter two theories predict a negative
relationship between size and leverage.

2.4.5 Growth

Therelationshipbetweengrowthandleverageisambiguous.Financingfirmoperationsthro
ughdebtcommitsthefirmstoservicethedebt.Ononehand,growthfirmsmayavoidtakingde
btasitmayleadthemtopassonprofitableinvestmentopportunitiesduetodebtservicing(My
ers,1977).

TitmanandWessels(1988)notethatgrowthopportunitiesarecapitalassetsthataddvalueto
afirmbutcannotbecollateralizedanddonotgeneratecurrenttaxableincome.Hence,thissu
ggestsanegativerelationshipbetweendebtandgrowthopportunitiesconsistentwiththeafor
ementionedtheories.Ontheotherhand,growthfirmsmaybeinneedofcapital,beyondintern
alfinancing,tofundtheirinvestments.Hence,theymaybemorelikelytotapthedebtmarketra
therthanequitymarketsashypothesizedbyMyersandMajlufsPeckingOrdertheory(1984)
.DeloofandVerschueren(1998)findapositive relationshipbetween leverage andgrowth.

GalaiandMasulis(1976)andJensenandMeckling(1976)havemodelledthatshareholderso
fleveredfirmshaveanincentivetoinvestsub-
optimallytodivertwealthfrombondholders.Theyfindthatthisagencyproblemismorepron
ouncedforgrowthfirmsthathavesignificantlylargeinvestmentopportunities.Inordertoav
oidthesub-
optimalinvestment,firmsingrowingindustrieswouldprefertouseequityfinancingoverdeb
tfinancing.Myers(1984)suggeststhatthis
agencyproblemcanbemitigatedthroughtheissueofshorttermdebtratherthan longterm
debt and Green(1984)suggests the useof convertible deb.

Rajan and Zingales (1995) find a negative relation between growth and
leverage.However, they suggest that this negative relationship could also be due to
firms timing their equity issue when their stock prices are high. This temporarily
causes leverage to be lower. Alternatively, Fama and French (1992) argue that high
leverage induces high costs of financial distress. The market tends to discount the
shares of firms in financial distress at a higher rate thus leading to the above stated
negative relation.

Following part of this paper discusses empirical evidence from previous studies.

2.5 previous empirical studies on Capital Structure

Empirical researchers have tried to determine which of the capital structure theories
companies follow. Initially this was done by examining which factors
determinedcompanies capital structure and the relationships between these
determinants of capitalstructure and leverage was interpreted in relation to existing
capital structure theories.
(Titman &Wessels, 1988; Harris &Raviv, 1991; Rajan&Zingales, 1995; Frank &
Goyal, 2009)

the inferences made between the determinants and capital structure theories were
possible due the static frameworks for which many of the empirical tests were
conducted. The relationship between the determinants and leverage is then Interpreted
in favors of a given capital structure theory, often a contest between the pecking order
theory and the trade-off theory. As such the main goal of these studies was to explain
the degree of leverage in companies by using company specific characteristics as
proxies for factors that theoretically should have an impact on capital structure
decisions, More recent empirical research focus on explaining changes in leverage as
well as explaining the level of leverage. This development comes naturally from the
development of the dynamic theories and the notions that factors such as adjustment
costs may cause companies to deviate from their optimal capital structures. Again the
pecking order theory and the trade-off theory are the opposing theories, where tests of
the pecking order theory looks at the relationship between changes in leverage and
companies financing deficits and the trade-off theory uses target adjustment models
to measure the speed at which companies adjust toward their capital structure.

Table 3 presents the empirical results from the studies reviewed in this paper, showing
the relationship between selected determinants and leverage. As shown, four
determinants show consistency in the results viz. profitability and growth
opportunities are consistently negative, whereas size and asset tangibility are
consistently positive.
Table 3: Summary of the implications of capital structure theories and empirical
evidences on the relationship of capital structure determinants with leverage.

Factors Predicted sign by theories Previous Empirical
Evidence
Profitability (-) negative sign, packing
order theory

(+) positive , trade off theory
Titman and Wessels (1988),
Rajan and Zingales
(1995), Antoniou et al,
(2002) and Bevan and
Danbolt (2002), Booth et al.
(2001), Pandey (2001),
Um (2001),
Wiwattanakantang (1999),
Chen (2004),
Al-Sakran (2001), Afza and
Hussain (2011),
Cspedes et al. (2010),
Cheng and Shiu (2007),
Fama and French (1998), Gill
et al. (2009), Gleason,
Mathur, and Mathur (2000),
Gropp and Heider
(2010), Hammes (1998),
Hovakimian et al. (2001),
Khrawish and Khraiwesh
(2010), Sharif et al.
(2012), Shah and Khan
(2007).

Aggarwal (1994), Burgman
(1996), DeAngelo and
Masulis (1980).
size (-) negative , packing order
theory

(+) positive , trade off theory
Mishra and Tannous (2010),
Shah and Khan (2007).
Cspedes et al. (2010),
Cheng and Shiu (2007), De
Jong,
Kabir, and Nguyen (2008),
Deesomsak, Paudyal, and
Pescetto (2004),Fama and
French (2002), Guney et al.
(2011), Gropp and Heider
(2010), Istaitieh and
Rodrguez-Fernndez
(2006),Khrawish and
Khraiwesh
(2010), Serrasqueiro and
Rogo (2009),Sharif et al.
(2012),Wald (1999), Rajan
and Zingales (1995),

Source: Compelled from various studies.

Shyam-Sunder and Myers (1999) tests the two theories on a balanced panel of 157
US companies and find that the pecking order theory is better at explaining capital
structure behavior of companies than the trade-off theory. Their results are
corroborated by similar findings of Lemmon and Zender (2010), who find that
companies who have excess debt capacity primarily use debt when a need for external
financing occurs.

Frank and Goyal (2003) reach the opposite conclusion when examining a large
Wiwattanakantang (1999),
Booth et al (2001), Pandey
(2001), Al- Sakran (2001),
and Huang and Song (2002),
Barclay and Smith, 1996;
Friend and Lang, 1988;
Barton et al., 1989; MacKie-
Mason, 1990; Kim et al.,
1998; Al-Sakran, 2001,
Hovakimian et al., 2004
Growth (-) negative , trade off theory

(+) positive packing order
theory
Bevan and Danbolt (2002),
Chen et al. (1997), Fama
and French (2002), M.C.
Jensen and Meckling (1986),
Rajan and Zingales (1995),
Shah and Khan (2007),
Myers (1977), Titman and
Wessels (1988), Smith and
Watts (1992, Chung (1993)
as well as Rajan and
Zingales (1995).
Booth et al (2001), Pandey
(2001), Cspedes et al.
(2010), Drobetz and Fix
(2003), Kashyap, Rajan, and
Stein, (1998), Tang and Jang
(2007), Yang et al. (2010),
Tangibility (+) positive , trade off theory

(+) positive , packing order
theory
Titman and Wessels, 1988;
Rajan and Zingales (1995),
Myers (1984, Titman and
Wessel (1988) and Rajan and
Zingales (1995).

sample of US companies and state that the pecking order theory performs poorly at
explaining capital structure. They show that the pecking order model is extremely
sensitive to the sample properties and by using a balanced panel similar to Shyam-
Sunder and Myers, they also find support for the pecking order model but when using
an unbalanced panel, the coefficient of the pecking order model dramatically
decreases. Contrary to what is suggested by the pecking-order theory, Frank and
Goyal (2003) find that the pecking model does a much better job at explaining large
companies leverage ratios, than it does small companies. A finding that is found in
many other studies as well. (Fama& French, 2002; Seifert &Gonenc, 2008) Seifert
and Gonenc (2008) conduct one of the only cross-country examinations of the
pecking order model and find that it does a poor job at explaining capital structure in
Germany, US and UK, but performs well on companies in Japan, although best on
data prior to 1990.

Fama and French (2002) use an alternative approach, looking at the capital structure
theories predictions about company dividend behavior as well as debt. The authors
results do not favor either theory and as such they conclude:

In sum, we identify one scar on the trade-off model (The negative relation between
leverage and profitability), one deep wound on the pecking order (the large equity
issues of small low-leverage growth companies), and one area of conflict (the mean
reversion of leverage) on which the data speak softly. (Fama& French, 2002, p. 30)

The conclusion from Fama and French highlight two interesting and important
discussions viz. the negative relationship between leverage and profitability as well as
the interpretation of the adjustment speed, or mean reversion as noted in Fama and
French (2002).

Matthews (1994) analyzed that the capital structuretheories grounded in the finance
paradigm (agency theory, transaction cost theory) have contributed to the
understanding of capital structure decision making. However, they do not address the
intricacies of capital structure decision making from a managerial choice perspective,
especially in privately held firms. This article brings together research from strategic

management, decision sciences, and social psychology to develop a conceptual model
for understanding capital structure decision making in privately held firms. In general,
it is posited that capital structure decisions are influenced by the firm owner's attitude
toward debt as moderated by external environmental conditions.

Ronoowah (1995) examined that the empiricalresearch on capital structure has
largely been confined to the US and other developed countries with very few studies
for developing economies. This paper attempts to supplement the existing literature
by bringing new evidences on the determinants of capital structure for the case of
companies listed on the Stock Exchange of the Small Island Developing State (SIDS)
of Mauritius. Results from the study reveal that certain firm specific factors which
explain capital structure in developed countries are also relevant in a small island
economy like Mauritius. Using panel estimations techniques for the 38 firms of the
Stock Exchange of Mauritius (SEM) for the period 1994-2004, the regression results
show that the most important firm specific factors that influence capital structure
choice in Mauritius are profitability, size, tangibility and liquidity.

Pathak (1997) examined the relative importance of sixfactors in the capital structure
decisions of publicly traded Indian firms. The papers related to emerging economies
usually group several countries together. The paper utilizes a larger data set of 135
firms in the period of 1990-2009 listed on the Bombay Stock Exchange (BSE) in
comparison to the earlier studies on India and examines additional factors. The paper
found that factors such as tangibility of assets, growth, firm size, business risk,
liquidity, and profitability have significant influences on the leverage structure chosen
by firms in the Indian context.

Das and Roy (1998) analyzed the existence of inter-industry differences in the capital
structure of Indian firms and identify the possible sources of such variations in capital
structure. The technique used for this cross-sectional analysis was one way analysis of
variance (ANOVA) and the analysis covers the pre and post-liberalization periods
separately to indicate if there is a clear break in the financing pattern of the Indian
firms due to the policy shift. Though differences in the firm size contributes to the
existing variation in financial leverage ratio across industry-classes to some extent, it
is the nature of the industry itself or more precisely the differences in the fund

requirement of industry groups based on the technology used, which is a potential
source of the existing variation.

Munyo (2002) analyzed the determinants of thesources of funding for the Uruguayan
firms through cross section econometric models and found that size, tangibility and
profitability are influencing variables in the financial structure such as the theories
suggest. The less profitable firms are those mainly financed through external funding.
The firms with a bigger proportion of tangible assets have easier access to long-term
banking credit. On the other hand, the firms which do not possess these features or the
ones which present a smaller relative proportion of these will tend to get financing
through trade credit lines.

Gonenc (2003) examined the impact of profitability,tangibility, size, and growth
opportunities on capital structure decisions of Turkish industrial firms with major
focus on the fact that corporate governance and equity ownership structure could
influence the relationship between debt ratios and firms' characteristics by using
regression analysis.

Chen (2004) investigated the determinants of thecapital structure of a sample of 972
listed companies on the Shanghai Stock Exchange and Shenzhen Stock Exchange in
China in 2003 and found that profitability is negatively related to capital structure at a
highly significant level. The size and risk of the firms are positively related to the debt
ratio - but only in term of market value measures of capital structure. The years of the
companies being listed on stock markets are positively related to capital structure,
indicating the access of the firms to debt finance is more easily judged by book value.
Tax is not a factor in influencing debt ratio. Ownership structure has a negative effect
on the capital structure. The firms with higher institutional shareholdings tend to
avoid using debt financing, a behavior that can be explained by entrenchment effects.
A further classification of the institutional shareholders reveals that, among the three
groups of institutional shareholding, the state institutions, including state agency and
state-owned institutions, were more averse to debt financing, particularly for state-
owned institutions. There is no strong evidence indicating debt-averse behavior by
domestic institutional shareholders.

Titman (2007) explored cross-sectional as well astime-series variation in debt ratios.
The author paid particular attention to interactions between financial distress costs
and debt holder/equity holder agency problems and examine how the ability to
dynamically adjust the debt ratio affects the deviation of actual debt ratios from their
targets. Regressions estimated on simulated data generated by the model are roughly
consistent with actual regressions estimated in the empirical literature.

Mat Kila and Wan Mansor (2008) tested thedeterminants of capital structure for the
firms listed in the Bursa Malaysia Securities Berhad (BMSB) market during the six
year period from 1999- 2005 and financial statements of 17 companies with numbers
of observations totaling 102 are used. The study used dependent variable as debt ratio
while the independent variables are size, growth, liquidity and interest coverage ratio.
Applying pooled OLS estimations, the result shows that the size, liquidity and interest
coverage ratio is significantly negatively related to total debt. However, the study
finds insignificant negative relation between capital structure and growth of the firm,
expressed by the annual changes of earnings. The results also reveal that there is
significant difference in capital structure among firms that adopt more debt (more
than 30 per cent of their total assets) and those which employ less leverage financing.

Cariola (2010) examined both capital-structure anddebt-maturity choices for SMEs.
The main findings of the analysis suggest that capital-structure and debt-maturity
choices interact as complementary factors and that corporate financial decisions are
not only the result of firm-specific or industry-specific characteristics, but are also
based on the institutional climate in which a firm operates. After controlling for
heterogeneity in firm characteristics, leverage was found to be positively influenced
by local financial development, while the enforcement system was less relevant.

Amidu (2007) took initiative to determine financing behavior of banks in Ghana,
suggested that profitability, assetstructure, size, growth and corporate tax have
significant influence on banks financing pattern and findings were consistent with
corporate finance theories such as trade-off, agency cost and pecking order theories.

Haque (1989) empirically tested the Bangladeshi firms and finds that capital structure

do significantly vary among industries and it has no significant impact on firms
profitability ,dividend and market value.

Chowdhury (2004), based on Bangladeshi and Japanese panel data, did another study
on capital structure determinants with agency variables and finds agency-debt,
bankruptcy risk, growth rate, profitability and operating leverage to significantly
affect capital structure choice.

Booth et al, (2001) in ten developing countries, and Huang and Song (2002) in China,
find that tangibility is negatively related to leverage. It is argued, however, that this
relation depends on the type of debt.
Bevan and Danbolt (2000 and 2002) also find a positive relationship between
tangibility and long-term debt, whereas a negative relationship is observed for short-
term debt and tangibility in the UK.

Wiwattanakantang (1999), Booth et al (2001), Pandey (2001), Al- Sakran (2001),
and Huang and Song (2002) find a significant positive relationship between leverage
ratios and size in developing countries. On the other hand, Bevan and Danbolt (2002)
report that size is found to be negatively related to short term debt and positively
related to long term debt.

Antoniou et al, (2002) argue that several studies find that the size of a firm is a good
explanatory variable for its leverage ratio. Bevan and Danbolt (2002) also argue that
large firms tend to hold more debt, because they are regarded as being too big to
fail.

Cassar and Holmes (2003) and Hall et al. (2004) found a positive association
between firm size and long-term debt ratio, but a negative relationship between size
and short-term debt ratio.Contradicting this, Booth et al (2001) revealed that,
generally a positive relationship exists between growth and debt ratios in all countries
in their sample, except for South Korea and Pakistan.

Pandey (2001) also argued that there is a positive relationship between growth and
both long term and short term debt ratios in Malaysia.

Smith and Watts (1992) provide empirical evidence, using US data that support a
negative relation between leverage and growth opportunities and Titman and Wessels
(1988) also estimate a negative empirical relationship between leverage and

R&D expenses. R&D is frequently treated as a proxy for growth opportunities.
Consistent with these predictions, Chung (1993) as well as Rajan and Zingales (1995)
find a negative relationship between growth and the level of leverage on data from
developed
countries.

Jensen and Meckling (1976) argue that the use of secured debt might reduce the
agency cost of debt. Um (2001), however, suggests that if a firms level of tangible
assets is low, the management for monitoring cost reasons may choose a high level of
debt to mitigate equity agency costs. Therefore, a negative relationship between debt
and tangibility is consistent with an equity agency cost explanation.

Velnampy and Nimalathasan (2008) examined about firm size on profitability
between Bank of Ceylon and Commercial Bank of Ceylon in Sri Lanka during ten
years period from 1997 to 2006 and found that there is a positive relationship between
Firm size and Profitability in Commercial Bank of Ceylon Ltd, but there is no
relationship between firm size and profitability in Bank of Ceylon. Various studies
identified the determinants of profitability (Islam and Mili, 2012, Velnampy, 2005 &
2005, 2013, Velnampy and Pratheepkanth, 2012, and Niresh and Velnampy, 2012)

Brander and Lewis (1986) and Maksimovic (1988) provide the theoretical
framework that linkscapital structure and market structure. Contrary to the profit
maximization objective postulated in industrial organization literature, these theories
are similar to the corporate finance theory in that they assume that the firm's objective
is to maximize the wealth of shareholders. Furthermore, market structure is shown to
affect capital structure by influencing the competitive behavior and strategies of firms.

Mohammed Omran (2001) evaluates the financial and operating performance of
newly privatized Egyptian state-owned enterprises and determines whether such
performance differs across firmsaccording to their new ownership structure. The
Egyptian privatization program provides uniquepost-privatization data on different
ownership structures. Since most studies do not distinguishbetween the types of
ownership, this paper provides new insight into the impact that
postprivatizationownership structure has on firm performance. The study covers 69
firms, which were privatized between 1994 and 1998.

For these newly privatized firms, these study documents significant increases in
profitability, operating efficiency, capital expenditures, and dividends. Conversely,
significant decreases in employment, leverage, and risk are found, although output
shows an insignificant decrease following privatization. The empirical results also
show that Egyptian state owned enterprises, which were sold to anchor-investors and
employee shareholder associations, seem to outperform other types of privatization,
such as minority and majority initial public offerings.

B.Nimalathasan&ValeriuBrabete(2010) pointed out capital structure and its impact
on profitability: a study of listed manufacturing companies in Sri Lanka. The analysis
of listedmanufacturing companies shows that Dept equity ratio is positively and
strongly associated to all profitability ratios (Gross Profit, Operating Profit & Net
Profit Ratios)

(Gitman, 2003)Capital structure decisions can have important implications for the
value of the firm and its cost of capital (Firer et al, 2008). Poor capital structure
decisions can lead to an increased cost of capital thereby lowering the net present
value (NPV) of many of the firms investment projects to the point of making many
investment projects unacceptable (known as the underinvestment problem). Effective
capital structure decisions will lower the firms overall cost of capital and raise the
NPV of investment projects leading to more projects being acceptable to undertake
and consequently increasing the overall value of the firm.

(De Jong et al., 2008)For investigating the presence of the pecking-order theory in

the Netherlands, this paper will make use of firm specific determinants. This paper
will analyze the relationship between leverage and the firm-specific determinant
Liquidity which is assumed to give explanations on the presence of pecking-order
behavior.

(Deesomsak, Paudyal, &Pescetto, 2004) Concerning the relationship between
liquidity and debt, the pecking-order theory assumes that there exists a negative
relationship because firms with highliquidity tend to borrow less. The thinking behind
this negative relationship from the pecking-order theory is that more liquid firms are
in possession of more internal funds. The pecking order theory assumes that these
internal funds are used first when financing is needed.

(Hillier et al., 2011)The other determinant specifically focusing on the static trade-off
theory that will be researched is Business risk. This determinant is also known as
cost of financial distress. As mentioned, firms experiencing a greater risk of financial
distress tend to borrow less than firms with a lower risk of financial distress. The
static trade-off theory implies that firms should balance tax advantages to be gained
from debt with the costs of financial distress (earnings volatility, bankruptcy costs).

Cotei and Farhat (2008) investigated the models used in testing the trade-off and
peckingorder theories at the industry level as well as across all industries. Under the
pecking order model, firms in financing deficit used debt to finance their new
investment whereas firms in financing surplus ended up retiring debt rather than
repurchasing equity. Hence, their results showed that for the pecking order model,
they rejected the hypothesis that firms had a symmetric behavior regardless of the
sign of the financing variable. Their results showed that firms had the tendency to
reduce debt by a significantly higher proportion when they had financing surplus
compared to the proportion of debt issued when they had financing deficit.

Joher, Ahmed, and Hisham (2009) paper draw on studies from finance and
accounting literature to revisit pecking order and static trade-off-hypothesis in the
context of Malaysia capital market. Their evidence from pecking order model
suggested that the internal fund deficiency was the most important determinant that
possibly explained the issuance of new debt. Hence pecking order hypothesis is well

explained in Malaysian capital market despite the lower predicting power. The
expanded pecking order model provides more vibrant explanation for debt issuance
with higher predictive power. Meanwhile, their result for static trade-off-model was
not fit to explain the issuance of new debt issue in Malaysian capital market. This is
an interesting findings that confirm the fact that Malaysian firms do not too much care
about tax-shield benefit derive from employ both debt and non-debt tax-shield.

Sukkari (2003) analyzed the determinants of the capital structure for Kuwait
companies during the time period 1996-2001. Based on company level data, the mean
total leverage ratio and the mean long-term debt to total debt are calculated. Based on
the empirical results, it found that the leverage ratios werelow and that company size
and company profitability were the most important determinants of leverage.

Buferna, et al., (2005) investigated the determinants of capital structure of Libyan
private and public companies utilizing data from 1995 to 1999. Debt was decomposed
into three categories: short-term, long-term and total debt. Theresults indicate that
profitable Libyan companies were externally financed andprefer short-term debt
sources. The main public companies use both short-termand long-term debt. Growing
companies tend to rely on their internal funds andlarge companies tend to have higher
leverage.

Sri Lanka is a developing country with one stock exchange, the Colombo Stock
Exchange (CSE) being the one andonly one. Nearly 293 companies are listed on CSE.
Like other developing economies, the area of capital structure is relatively unexplored
in Sri Lanka. Limited research work exists in this area. The purpose of this study is to
fill this void to some extentby providing empirical evidence from a developing
countrys perspective. However, this study was confined all sector companies.
However this sector plays an important role in the Sri Lankan economy after ethnic
war.

This chapter have discussed and presented the pecking order theory and the trade-off
theory as the most dominant and influential theories of capital structure. The theories
each provide alternative views and explanations on why companies choose their
capital structures as they do. The pecking order theory and trade-off theory is often

depicted as the two main competing theories and previous empirical evidences show
profitability , size, tangibility and growth are the factors which affecting capital
structure decisions of a company.

CHAPTER 03
METHODOLOGY
3.1 Objectiveof thechapter

Therearemanypurposesofthischapter.Firstpurposeistoexplainwhatdataisused.Secondai
m
ofthechapteristoputlightonstatisticsofleverageanditsdeterminants.Third,toexplainwhat
modelsarebeingusedtoanalyzethedata?Finalpurpose ofchapter
istodefinetheproxiesofvariables.

3.2 Research Design

The objectives of this research are to investigate the factors affecting capital structure
decision ofthe firms in Sri Lankan capital market, to analyze how firms in theall
sectors raise capital for investments, internally or externally (with debt, equity, or debt
to repurchase equity).

Having reviewed a number of literatures in term of capital structure, i will now
conduct an empirical study on Sri Lankan listed companies, answering the following
research questions:

1. What are the factors effecting capital structure decision of listed companies in Sri
Lanka?
a. As in the pecking order hypothesis, does the firms profitability have a
negativerelationship with the level of leverage? And as implied by the trade-
off theory, does thefirms profitability have a positive relationship with the
leverage?
b.As suggested by the trade-off theory, does size have a positive relationship
with the leverage? And as suggested by the pecking order theory of the capital
structure, isthere a negative relationship between the leverage and the size of
the firm?
c. Analyze the relationship between asset tangibility and debt ratios as implied
by the trade-off theory and market timing theory.

d.Investigate the relationship between growth and debt ratios as implied by the

2. Try to examine the impaction of profitability, size, tangibility and size on leverage

In this study, quantitative data method will be used. For analyzingVariables
correlation and multiple regressions method will be applied to examine the
Relationship and Significant level of impacts between different variables.

3.2.1Research Process

Step 01Wish to do research, Formulate and clarify research topic

I formulate and clarify the research topic, it is written to assist me in the generation of
Ideas, which will help to choose a suitable research topic, and offers advice on what
makes a good research topic. As soon as i have found a research topic, i refine it into
one that is feasible, after the idea has been generated and refined, i turn this idea into
clear research questions and objectives, this step is applied in chapter 1.

Step 02Critically review the literature

I reviewed some critical literature to outline what to include and decided on the range
of secondary and tertiary literature sources available, this step is applied in chapter 2.

Step 03Research methodologies, choose researchapproach and strategy

I worked on the research methodology, research approach and the strategy. A clear
research strategy is crucial because the credibility of research findings and
conclusions depend on it. At this step, i wrote the conceptual framework and the
hypotheses formulation by analyzing capital structure theories and some previous
research, at step three, I plan data collection which is concerned with different
methods of obtaining data, this step is applied in chapter 3.

Step 4Analyze data using both correlation and regressions method

At this stage I analyze using correlation and regression method by using spss 17,
outlines, and discusses the main results to analyze data,this step is applied in chapter
4.

Step 05Write research report and prepare presentation

In this step, I write the project report and the prepare presentation with the structure,
content and style of final research report. This step is applied in chapter5.

Step 06Submit report

After we finish all of the earlier steps of the research process, I hope i will submit the
research report (the thesis) in time.

3.3 Data & Data Collection

Research samples that I used were all 20 sectors companies which are listed in
Colombo stock Exchange, till to the date there are 294 companies are registered as
listed companies in all 20 sectors ,Therefore, my research populations is 294 listed
companiesin CSE2009 to 2013.

3.3.1 Sampling Design

Sampling design is a definite plan for obtaining a sample from a given population. It
refers to the technique or the procedure the researcher would adopt on selecting items
for the sample (Kothari, C.R., 2004).

The sample of this study is confined to the all 20 sectors in Sri Lanka, by each sectors
I have selected 2 companies randomly for my research purposes, therefore my
research sample size is 40 listed companies in all 20 sectors.

3.3.2 Data Source

The present study used secondary data for the analysis. Thedata utilized in this study
is extracted from the comprehensiveincome statements and financial position of the
sample companies listed in Colombo Stock Exchange (CSE) database.
In addition to this, scholarly articles from academic journals and relevant text books
were also used.

3.4. Variables Measurement
Tested variables in my research were leverage, growth opportunity, profitability, size,
asset tangibility.
The following are the measurements of the research variables.

3.4.1. Variables

My research variables of hypotheses are including leverage as dependent variables,
while growth opportunity,profitability, risk, size, and asset tangibility as independent
variables. The following sub-section isthe description of how we measure the
variables.

3.4.1.1 Leverage

The leverage of a firm can be measured by many different variables. For instance,
Pandey(2001) measured leverage as market value of long term debt to total asset,
market value of short term debt to total asset, market value of total debt to total asset,
book value of long term debt to total asset, book value of short term debt to total
asset, and book value of total debt to total asset. Chen and Hammes (2003) measured
leverage as book capital ratio, and market capital ratio as primary measures of
leverage, where market capital ratio was market capitalization replacing thebook
equity. They used book debt ratio (total debt to total asset) as a secondary measure.

I choose leverage ratios in this study. These measures of leverage ratios examine the
capital employed and thus represent the effects of past financing decisions best. Our
measurement of book leverage is as measured by Rajan and Zingales (1995), Leary

and Roberts (2005), and Sbeiti (2010), and of market leverage is as measured by
Bulan and Yan (2009).

Leverage = Shareholders fund (equity) / outsiders fund

3.4.1.2Profitability

Profitability plays an important role in leverage decisions. Profitability is proxies by
return on assets. ROA represents the contribution of the firms assets on profitability
creation.

Profitability is a measure of earning power of a firm. The earning power of a firm is
generally the basic concern of its shareholders. Akhtar and Oliver (2006) measured
profitability as the average net income to total sales for the past four years.
WafaaSbeiti (2010) measured profitability as the ratio of operating profit to book
value of total assets. Titman and Wessels (1988), Drobetz and Fix (2003) measured it
as the ratio of operating income over total assets (ROA) and the ratio of operating
income over sales. Chen and Hammes (2003), Rajan and Zingales (1995),
AbimbolaAdedeji, Francisco Sogorb-Mira y Jos Lpez-Gracia (2003) measured
profitability as earnings before interest and taxes divided by total asset.

I measure profitability as:
Profitability = earnings before interest and taxes divided by total asset.

3.4.1.3 Size

Firm size provides a measure of the agency costs of equity and the demand for
risksharing. Firm size is likely to capture other firm characteristics as well (e.g., their
reputation in debt markets or the extent their assets are diversified). Titman and
Wessels (1988) and Drobetz and Fix (2003) measured firm size as the natural
logarithm of net sales. Chen and Hammes (2003) measured firm size as in Rajan and
Zingales(1995) that is the natural logarithm of total turnover. Akhtar and Oliver
(2006), Leary and Roberts (2005), Francisco Sogorb-Mira y Jos Lpez-
Gracia(2003), and Sbeiti (2010) measured size as the natural logarithm of total assets.

I measure size as:
Size = the natural logarithm of sales.

3.4.1.4 Tangibility

The tangibility of assets represents the effect of the collateral value of assets of the
firms leverage level. There are various conceptions for the effect of tangibility on
leverage decisions. If debt can be secured against assets, the borrower is restricted to
using debt funds for specificprojects. Creditors have an improved guarantee of
repayment, but without collateralized assets, such a guarantee does not exist.

Leary and Roberts (2005), Bulan and Yan (2009) measured tangibility as net property,
plant and equipment divided by total assets. Huang and Song, Drobetz and Fix (2003),
AbimbolaAdedeji, DilekTeker,OzlemTasseven, and AycaTukel (2009) measured
tangibility as fixed assets divided by total assets.

I measure Tangibility as:
Tangibility = fixed assets divided by total assets.

3.4.1.5 Growth Opportunities

The growth potential of a firm can be measured by many different variables. Rajan
and Zingales (1995) measured growth as Tobins Q, LaarniBulanand Zhipeng Yan
(2009) measured growth as market-to-book ratio as market equity/book equity, and
Akhtar and Oliver (2006) defined it as the average percentage change in total assets
over the previous four years. Chen and Hammes (2003), Leary and Roberts (2005),
and Sbeiti (2010) measured growth opportunities as the ratio of market value of assets
(book value of assets plus market value of equity less book value of equity) to book
value of assets.

I measure growth opportunities as:
Growth = Difference in total assets / Total assets

3.5 CONCEPTUAL FRAMEWORK
3.5.1 Conceptual Framework for Research Question 1a, 1b, 1c, and 1d

Conceptual framework is a schematic research model to help researchers answering
the research problems based on theory and relevance previous research. I formulate
my conceptualframework for hypotheses 1, 2, 3, 4 and 5 as follows:

3.5.1.1 Hypothesis development

The variables that i tested regarding the factors affecting capital structure decisions
are including collateral value of assets, growth, profitability and size. Then, I draw the
figure of conceptual framework for research questions 1a, 1b, 1c and 1d.
Based on my conceptual framework for research questions 1a, 1b, 1c, and 1d, I
analyzed the previous research findings for each variable.

Figure 3.1 Conceptual Frameworks for Research Question 1a, 1b, 1c and 1d

Independent Dependent Variable
Variables

Determinants of Capital Structure
Based on Theories of
Capital Structure:
-Pecking Order
Theory
- Trade-Off Theory

Profitability

Size

Tangibility

Growth

Leverage

3.5.1.2 Leverage
Leverageratioistakenasdependentvariablewhilesearchingforthefactors affecting
capitalstructure decisions.I am takingintoaccounttheequity and outsider fund for
calculatingleverageratioinsteadofmarketvalueoftotalassetsbecauseitisconsideredwhenc
ompanyeithergivingthecollateralforloanorfacingthebankruptcy.
Bookleverageispreferredbecausefinancialmarketisfluctuatingovertimeatagreatlevel,the
reforemanageraresaidtorelyonbookvaluewhileconsideringthefinancingpolicyofthefirm.
ThisviewisconsistentwithargumentofGrahamandHarvey(2001)thatlargenumberofman
agersdoesnotrebalancewithfluctuationinfinancialmarket.
FamaandFrench(2002)arguethatbookLeverageisfigurethatismorereliableandfreefromt
heeffectofthosefactorswhicharebeyondthecontroloffirm.Manydefinitionsofdebthavebe
enusedinliterature.FrankandGoyal(2009)usefourdefinitionsofLeveragewhichare1)long
termdebt(LTD)overmarketvalueofassets,2)LTDoverbookvalueofassets,3)totaldebt(TD
)overmarketvalueofassetsand4)TDoverbookvalueofasset.Althoughcapitalstructuretheo
riesuselongtermdebtasproxyofLeverageoffirm(Jongetal2008)butiuseheretwoproxies:E
quity andoutsiders fund.

3.5.1.3 Profitability

Profitabilitycanbemainindependentvariablethatdeterminescapitalstructureandrepresent
peckingorderandtrade-offtheoriesquiteclearly.Asmentioned
inliteraturereviewthattrade-offtheorysaysfirmsidentifythetargetLeverage
bycomparingbenefitfromandcostofleverage.Anydecrease(increase)incost(benefit)allo
wsthefirmtoreadjusttargetleveragebyenhancingdebt.Profitablefirmarelessriskywithfre
quentcashflowfrombusinessdecreasingthecostoffinancialdistresssuchasbankruptcycost
.Itisunanimouslyrecognizedthatmoreprofitabilityinworldoftaxwithmoreleveragecansav
emoretaxforshareholdershowingbenefitfromleverage.Morebenefitfromleveragewilldis
turbcostbenefitrelationshipthusallowsthefirmtoborrowmore.FrankandGoyal(2009)arg
uethatexpectedcostoffinancialdistressislowforprofitablefirmsthusfindingtaxshieldmore
valuable.ThisreflectsthepositiverelationshipbetweenLeverageandprofitability.Agencyc
ostperspectivealsoregardeddebtasadisciplinarymeasureandmorevaluableforfirmswithh
ighprofitproducingthemorefreecashflow(Jensen,1986).Itmeanstrade-
offtheorysuggestspositiverelationshipbetweenprofitabilityandleverage.MargaritisandP

sillaki(2007) arguethatprofitabilityhaspositiveeffectonLevoffirm.

Hypothesis1a:Trade-
offtheorysuggestspositiverelationshipbetweenprofitabilityandleverage.

Contrarytotrade-
offtheory,peckingordertheorysuggeststhatprofitablefirmprefertouseretainedearningsto
financetheircurrentorpotentialprojects.Myers(1984)arguesthatfirmswithnoprofitorinsu
fficientprofitprefertoborrowdebtandthenissueequitysecuritiesifrequirementforthefunds
isnotfulfilledbydebtborrowing.Itmeanspeckingordertheorypredictsnegativerelationshi
pbetweenprofitabilityandleverage.
Pandey (2001) results showed that profitability had a significant inverse relation with
all types of book and market value debt ratios. He showed that the results confirmed
findings of earlier studies and were consistent with pecking order theory (Myers,
1984) that postulated a negative relationship between profitability and debt ratio. The
negative relationship between profitability and debt ratios contradicted with the tax
shield hypothesis. He also showed that profitability seemed to be the most dominant
determinant of nm of Malaysian firms as it generally had high beta coefficients and
t-statistics that were significant at 1% level of significance and
Someempiricalevidencesalsovalidatenegativecorrelationbetweenprofitabilityandlevera
ge(Tong&Green,2005),(Huang&Song,2006),(Frank&Goyal,2009).

Hypothesis1b:Peckingorder theoryexpectsnegativerelationship

3.5.1.4 Size
Size can be another important determinant of capital structure because literature
review shows contradicting views about the relationship between size and leverage.

Larger firms are more diversified, have less default risk, and lower cost of financial
distress. Larger firm diversification advantage reduces bankruptcy (Titman &Wessels,
1988). Therefore according to trade-off theory any decrease in cost of leverage allows
the firm to increase leverage thus predicts positive relationship between size and
leverage because size of firm diminishes the cost of leverage.
Hypothesis 2a: Trade-off theory explains positive relation between size and
leverage.
Pecking order theory is interpreted as it predicts negative relationship between size
and leverage because larger firms are well known and have longer/older history of
adding retained earnings in their capital structure (Frank &Goyal, 2009).
Therefore firm with more retained earnings additions should have less leverage.
Margaritis and Psillaki (2007) find non-monotonic relationship between size and
Leverage. They find size is negatively related to low leverage ratio and positively
related to mid and high leverage. Larger firm generates more profit as compared to
small firm therefore according to pecking order theory profitable firm prefers internal
financing than external one. This suggests that size is negatively related with leverage.
Hypothesis2b:Peckingordertheorydepictsnegativerelationshipbetweensizeandlev
erage.

3.5.1.4 Tangibilityof asset

Afirmwithmorephysicalassetcanborrowatcheapercostofdebtcapitalascomparetocompa
nywithlessphysicalassets.Thetangibilityofassetsoffersthebargainingpowertocompany.J
ensenandMeckling(1976)
pointoutthatagencycostbetweenthecreditorsandshareholdersexistsbecausefirmmayinv
estinriskierprojectsafterborrowingandmaytransferthewealthfromcreditorstoshareholde
r.Companieshavingmorefixedassetcanborrowmorebypledgingtheir
fixedassetascollateralandmitigatinglendersriskofbearingsuchagencycostofdebt(Rosset
al2008).Thereforefirmwithlowagencycostcanincreasethedebtitmeanstrade-
offtheorypredictspositiverelationshipbetweentangibilityofassetsandleverage.

MargaritisandPsillaki(2007) arguethat
tangibilityoffirmispositivelyrelatedtoLeverage.Studiesconductedby
Jong,etal(2008)andHuang&Song(2006)alsosuggestthepositivecorrelationbetweenfixed
assetandleverage.FrankandGoyal(2009)foundpositiverelationshipbetweentangibilitya
ndLeveragelevel.However resultsfrom
developingworldaremixed.Shah&Khan,(2007)foundsignificantpositiverelationshipbet
weentangibility andLeverageforPakistanifirms.
Boothetal(2001)findnegativerelationshipbetweentangibilityandLeverageintendevelopi
ngcountries(including Sri
Lanka).Huangandsong(2006)experiencesignificantpositiverelationshipbetweentangibil
ityandLeverageinChina.

Hypothesis3a:Trade-offtheorypredictspositiverelationshipbetween
tangibilityandleverage.

ThenegativerelationshipbetweentangibilityandLeverage,mayinfertheresultsconsistent
withpredictionsofmarkettimingtheorybecauseiffirmhasmoretangibilityandissuesequity
mayindicatemispricingoffinancialinstrumentsforexampleovervaluationofshares,underv
aluationofbondetc.Otherreasonsmayincludecheapcostofequityriskpremium,expensivec
ostofdebt.Markettimingtheorysuggestswhenthestockpriceinthemarketisovervaluedthen
basedonasymmetricinformation,thecompaniesissuetheequity.Firmsbuytheir
ownstockwhenprice ofstockisperceivedundervalued.

Hypothesis3b:Markettimingtheorypredictsnegativerelationshipbetweentangibilityandle
verageif firmshavemoretangibleassetsandissuemore equity.

3.5.1.6 Growth
Growth can be a good independent variable and derived from pecking order theory and trade-
off theory. There are conflicting views found in theories of corporate capital
structureregardingtherelationshipbetweengrowthandleverageofthefirm.Accordingtopec

kingordertheorythecompanyfirstfinancesitsprojectsbyinternalfinancing(Ross,etal2008
)thatmaynotsufficientintheconditionofgrowth.
Sothecompanyshouldincreaseitsleverageduringgrowthperiod.Itmeanspeckingorderthe
oryindicatesthepositiverelationshipbetweengrowthandleverage.
TongandGreen(2005)findsignificantpositiverelationshipbetweengrowth andleverage.

Hypothesis4a:Peckingordertheoryforecastspositiverelationshipbetweengrowthan
dleverage.

Ontheothersidegrowthisincreasingcostandprobabilityoffinancialdistresswhenthecomp
anyborrowingmoredebttosupportgrowthopportunities.Andincreasingcostoffinancialdis
tressmayrestrictfirmfromborrowingmore;itmeanstrade-
offtheorysuggestsnegativerelationshipbetweengrowthandLeverageoffirms.Jongetal(20
08)andHuangandSong,(2006)showedoutthenegativerelationshipbetweenthegrowth
opportunitiesandLeverageofthefirm.

Hypothesis4b:Trade-
offtheoryexpectsnegativerelationshipbetweengrowthandleverage.

leverage.

3.6 Hypotheses Testing

I have tested hypotheses H1a- H4b using correlation and regression. I used this
statistical technique as i explored correlated relationships between the predictor and
criterion variables. The criterion variable and the predictor variable And I use
regression to test hypotheses H5 I used this technique as I explored impacts between
dependent and independent variables.

3.6.1. Regression

The objectives of testing hypothesis to examine the influence of growth opportunity,
profitability, size, and asset tangibility on leverage.

The regression equation for hypotheses is as follows:
Z=0+1X1+2X2+nXn+
Where,Z=RegressionScore
0=Regressionconstant
1=RegressionCoefficient
Inordertoderivetheexistingrelationshipbetween X1-----Xnare the independent
variables
=errorterm

3.7. The Limitations of Research Design

There is no research project without limitations; and there is no research as a perfectly
designed study. It is in line with Patton (1990), who noted that there are no perfect
research designs and there are always trade-offs. Yin (2003) also noted that
limitations derived from the conceptual framework and the studys design.
Furthermore, each method, tool or technique has its unique strengths and weaknesses
(Smith, 1975).

Since all different methods will have different effects, it makes sense if i use different
methods to avoid the method effect. It will lead us to greater confidence being placed
in my conclusions. Therefore, it is quite usual for a single study to combine
quantitative and qualitative methods and/or to use primary and secondary data. There
are two major advantages to employ multi-methods in the same study. First, different
methods can be used for different purpose in a study. The second advantage of
applying multi-methods is that it enables triangulation to take place. Triangulation

refers to the use of different data collections methods within one study in order to
ensure that the data are telling us what we believe they are describing us. In my
research, i had two limitations as follow, the first is regarding to the limitation of data,
as sometimes the data are not complete. The second is regarding to the data analysis.
Therefore, i used regression and augmented equations.

CHAPTER 4
PRESENTATION OF DATA AND ANALYSIS OfRESULTS

4.1Objectiveof thechapter

Thisismostexcitingchapterinwhichstudyanalyzesandinterpretstheresults.Chapter try to
answer the research questions

throughansweringthefollowingstimulatingquestions:Dotheresultssupportthehypothesis
?Which theory is suit for Sri Lankan Firms to build their capital structure or which
theory prediction is true on Sri Lankan firms climate?

4.2 Determinants of Capital Structure

To determine the various factors affecting the capital structure of the company,
correlation and regression analysis has been carried out using SPSS 17.0 and the
results are shown below.

The purpose of regression and correlation analysis is to analyze relationships among
variables and measure the strength of the linear relationship between the variables.
According to Swanson and Holton (2005), it is the most popular statistical technique
for hypothesis testing and is used to measure the naturally occurring level of variables
to predict the score on the dependent variable. The advantage of these correlations
and regression analysis methods often cited is its ability to test and reveal relationship
between the dependent variable and independent variables with different levels of
significance. Correlations and Regression analysis have been widely used in Capital
Structure studies such as Ram Kumar Kalkani et al (1998), AnuragPahuga( 2010),
prahalathan (2007), Ajanthan (2012), and the same is used in this studies.

According to Cohen (1988) the value of the Correlation coefficient (r) can vary from
1 (perfect positive correlation) to -1 (perfect negative correlation). When r =0, there is
no relationship. Relationship can be either positive or negative, and when r is 0.1 to
0.3; small correlation, when r is 0.3 to 0.5; moderate correlation, and when r is 0.5
and above; strong correlation.
4.2.1 Examining the Relationships between Leverage and Profitability, Size,
Tangibility and Growth.

Inattempt to examine the relationships between Leverage and Profitability, Size,
Tangibility, Growth, this study performed correlation and regression analysis.

Table 4.1

Correlation between dependent and independent variable
Variables Correlation
Leverage
1.000
Profitability 0.876

Size -0.598
Tangibility 0.662
Growth -0.769
Significance ( 2tailed) 0.000

**. Correlation is significant at the 0.01 level (2-tailed).

Table 4.1 indicates that leverage ratio is positively related with two explanatory
variables profitability and tangibility with Pearson correlation coefficient of 0.876and
0.662respectively which shows strong positive relationship. However, the correlation
results show negative relationship between size and leverage, growth and leverage
withPearson correlation coefficientof -0.598,-0.769 which shows strong negative
relationships, findings being consistent with trade-off and packing order theories.
The Pearson correlations of leverage and profitability leverage and tangibility positive
while leverage and size, leverage and growth are negative also results are statistically
significant.

Table 4.2
Regression Estimates of Determinants of Capital Structure

Independent
Variables
Beta Significance
Constant
-101.652
.394
Profitability
1687.617 .000

Size
-15.390 .023
Tangibility
1001.714 .019
growth
1412.800 .000
R value 0 .936
R square value 0.875
Adjusted R square value 0.861
Significance 0.000
Correlation is significant at the 0.05 level (2-tailed)

The regression table 4.2 above shows R value is 0 .936 which indicatesstrong
positive correlation between dependent and independent variables, the R square value
from the table is 0.875 (Adjusted R square is 0.861) which indicates a shared variation
of about 87% between leverage and other independent variables. That is,
approximately 87% of variances in Leverage can be accounted by Profitability, Size,
Tangibility and Growth.

The model shows an ANOVA significance of 0.000 or no chance in 1000 of Type-1
error (incorrect rejection of null hypothesis), implying that the data between
Profitability, Size, Tangibility, Growth and Leverage are strongly correlated and there
is a good model.

Regression equation is
Leverage= -101.65 + 1687.61 profitability - 15.390 size + 1001.71 tangibility +
1412.8 growth
4.3 Testing hypothesis

4.3.1 Profitability

H1a:Trade-offtheorysuggestspositiverelationshipbetweenprofitabilityandleverage.
H1b:Peckingorder theoryexpectsnegativerelationship

Accordance with correlation model table 4.1 shows there is 0.876 strong positive
relationships between leverage and profitability throughout the all the sectors in Sri
Lankan listed companies; hereby study has accepted H1a through that accept trade-
off theory which suggests the positive relationship between leverage and
profitability.

Trade-off theory framework is expected, when firms are profitable, they should prefer
debt to benefit from the tax shield. In addition, if past profitability is a good proxy for
future profitability, profitable firms can borrow more as the likelihood of paying back
the loans is greater. From the trade-off theory point of view more profitable firms are
exposed to lower risks of bankruptcy and have greater incentive to employ debt to
exploit interest tax shields. Hence, high profitability firms in all 20 sectors of CSE
want to take benefit from the tax shield.

4.3.2 Size

H2a: Trade-off theory explains positive relation between size and leverage.
H2b: Peckingordertheorydepictsnegativerelationshipbetweensizeandleverage.
Accordance with correlation model table 4.1 shows there is -0.598 strong negative
relationships between size and leverage throughout the all 20 sectors in Sri Lankan
listed companies. Here by study has accepted packing order theory which suggests
there is negative relationship between leverage and size of a firm, through that accept
H2b. hence accept packing order theory in word of size and leverage relationship.
This study result is consistence with some previous studies which had negative result
for this relationship was as follows. Huang and Song (2002) concluded that, on the
relationship between size and leverage, if size is interpreted as a reversed proxy for
bankruptcy cost, it should have less or no effect on Chinese firms because of soft
budget constraint firms should have much less chance to go bankrupt.

Rebel A. Cole (2008), stated that firm size, as measured by the natural logarithm of
total assets, was inversely related to firm leverage, and this relation was significant

better than the 0.001 level in each survey.In other words, larger firms used
significantly less debt in their capital structure.

Rajan and Zingales(1995) argued that the problem of undervaluation of new equity
issue for large firm was not severe as there was less information asymmetry about
them. Hence size should be negatively related to leverage.
Gaud, Jani, Hoesli, and Bender (2003) analyzed the determinants of the capital
structure for a panel of 106 Swiss companies listed in the Swiss stock exchange. Both
static and dynamic tests were performed for the period 1991-2000. They found that
the size of companies, negatively related to leverage.

4.3.3Tangibilityof asset

H3a:Trade-offtheorypredictspositiverelationshipbetweentangibilityandleverage.
H3b:Markettimingtheorypredictsnegativerelationshipbetweentangibilityandleverageif
firmshavemoretangibleassetsandissuemore equity.

Accordance with correlation model table 4.1 shows that there are0.662 strong positive
relationships between assets tangibility and leverage ratio throughout the all 20
sectors in Sri Lankan listed companies. Hereby accept H3a which predicted by trade
of theory.
Study result which has found positive relationship between asset tangibility and
leverage ratio consistence with some previous studies which conclude positive
relationship are as follows: Drobetz and Fix (2003), found that tangibility was almost
always positively correlated with leverage. They showed that this supported the
prediction of the trade-off theory that the debt-capacity increased with the proportion
of tangible assets on the balance sheet.
Rebel A. Cole (2008) found tangibility was positive across each of the four surveys
and was statistically significant at better than the 0.05 level for each survey except for
the year 2003. According to Frank and Goyal (2006), the relation between tangibility
and leverage was reliably positive in cross-sectional studies of publicly traded firms.

Shah and Khan (2007) found that tangibility, with coefficient of 0.1304 was
significantly related to debt. Thus their hypothesis was confirmed by the statistically
significant positive relationship between tangibility and leverage. This finding was in
contrast to the earlier finding by Shah andHijazi (2004). They found that tangibility
was not significantly related to leverage ratio.
In the Han-Suck Song (2005) study, as can be seen, the coefficients of tangibility
werehighly statistically significant for all three debt measures. But while the results
showed that tangibility had a positive relationship with the total leverage as expected
according to the theoretical discussion above this finding wasconsistent with the
results of Bevan and Danbolt (2000),Huchinson et al. (1999), Chittenden et al. (1996)
and Van derWijst and Thurik (1993) report (Michaleas et al., 1999). Indeed, this
result supported the maturity matching principle: long-term debt forms were used to
finance fixed (tangible) assets, while non-fixed assets were financed by short-term
debt (Bevan and Danbolt, 2000).
Gaud, Jani, Hoesli and Bender (2003) showed that the coefficient of the tangibility
variable was positive and significant for the panel data estimations, and this result was
similar to those reported in previous research (Rajan and Zingales, 1995; Kremp et al.,
1999; Frank and Goyal, 2002).

4.3.4 Growth
H4a:Peckingordertheoryforecastspositiverelationshipbetweengrowthandleverage.
H4b:Trade-offtheoryexpectsnegativerelationshipbetweengrowthandleverage.

Accordance with correlation model table 4.1 found that there is -0.769 strong
negative relationships between growth and leverage throughout the all 20 sectors in
Sri Lankan listed companies. Hereby study has accepted trade off theory relationship
between growth and leverage ratio, hence H4b accepted.

Study result is in line with what agency costs / trade-off theory that the growth was
negatively related with market leverage. Agency costs for growth firms are expected
to be higher as these firms have more flexibility with regard to future investments.

The reason is that bondholders fear that such firms may go for risky projects in future
as they have more choice of selection between risky and safe investment
opportunities. Deeming their investments at risk in future, bondholders will impose
higher costs at lending to growth firms. Growth firms that are facing higher cost of
debt will use less debt and more equity. Congruent with this, Titman and Wessels
(1988), Barclay et al. (1995) and Rajan and Zingales (1995), all found a negative
relationship between growth opportunities and leverage.
Following the trade-off theory, for companies with growth opportunities, the use of
debt is limited as in the case of bankruptcy, the value of growth opportunities will
beclose to zero, growth opportunities are particular case of intangible assets (Myers,
1984; Williamson, 1988 and Harris and Raviv, 1990). Firms with less growth
prospects should use debt because it has a disciplinary role (Jensen, 1986; Stulz,
1990). Firms with growth opportunities may invest sub-optimally, and therefore
creditors will be more reluctant to lend for long horizons. This problem can be solved
by short-term financing (Titman and Wessels, 1988) or by convertible bonds (Jensen
and Meckling, 1976; Smith and Warner, 1979). According to agency costs, on the
other hand, Myers (1977) argued that due to agency problems, firms invested in assets
that might generate high growth opportunities in the future faced difficulties in
borrowing against such assets. For this reason, we might now instead expect a
negative relationship between growth and leverage.
Some research found the negative result, such as Huang and Song (2002), concluded
that the static trade-off model seemed better than the pecking order hypothesis in
explaining the features of capital structure for Chinese listed companies. They used
sales growth rate to measure the past growth experience and Tobins Q to measure a
firms growth opportunity in the future, their finding showed that firms with a high
growth rate in the past tended to have higher leverage, while firms that had a good
growth opportunity in the future (a higher Tobins Q) tended to have lower leverage.
Sbeiti (2010) found a negative relation between growth opportunities and leverage; it
was consistent with the predictions of the agency theory that high growth firms used
less debt, since they did not wish to be exposed to possible restrictions by lenders.
However, variables such as market to book ratio reflected the capital market valuation
of the firm, which in turn was affected by the conditions of the capital market.

In the Shah and Khan (2007) study, growth variable was significant and was
negatively related to leverage. As expected, this negative coefficient showed that
growth firms did not use debt financing. Their results were in conformity with the
result of Titman andWessels (1988); Barclay, et al. (1995) and Rajan and Zingales
1995). The usual explanation was that growing firms had more options of choosing
between safe and risky firms.
In Gaud, Jani, Hoesli, and Bender (2003), the negative sign of growth confirmed
thehypothesis that firms with growth opportunities were less levered.

4.3.4Impaction on leverage by profitability, tangibility, size and growth
leverage.
Accordance with regression model table 4.2 there is 87% implication by predicted
variables on Leverage at the significant level of 0.000 which indicates there is no
chance for Type-1 error since that study cannot reject the null hypothesis hence H5
accepted

4.4 Summarized Hypothesis Testing
Table 4.3
Summarized Hypothesis Testing
No Hypothesis Results Tools
H1
a
Trade-
offtheorysuggestspositiverelationshipbetweenprofitabilityan
dleverage
Accept
ed
Correlati
on
H1
b
Peckingorder theoryexpectsnegativerelationship

Reject
ed

H2
a
Trade-off theory explains positive relation between size and
leverage.

Reject
ed

H2
b
Peckingordertheorydepictsnegativerelationshipbetweensize
andleverage.
Accept
ed
Correlati
on
H3
a
Trade-
offtheorypredictspositiverelationshipbetweentangibilityandl
everage.
Accept
ed
Correlati
on
H3
b
Markettimingtheorypredictsnegativerelationshipbetweentangibilit
yandleverageif firmshavemoretangibleassetsandissuemore equity.
Reject
ed

H4
a
Peckingordertheoryforecastspositiverelationshipbetweengr
owthandleverage.

Reject
ed

H4
b
Trade-
offtheoryexpectsnegativerelationshipbetweengrowthandleve
rage.
Accept
ed
Correlati
on
H5
There is significance impact of profitability, tangibility,
size and growth onleverage.
Accept
ed
Regressi
on

.
CHAPTER 05
CONCLUSION AND RECOMENTDATION

5.1Objective of the chapter

The main objective of this chapter is to conclude the whole study. This is shortest
chapter of the study that comprises on conclusion. Study concludes that how this
study is contributing capital structure decisions.

5.2. Conclusion

Based on the results analysis of each hypotheses testing, overall, conclusions are as
follow:
profitability has a positive relationship with leverage this suggest that when firms are
highly profitable they are going for outsider fund to finance their capital, the reason
behind on it is if firm is profitable it could able get debt easily since creditors think
low bankruptcy there and frequent cash flow would be there so that their debt is less
risky. More than this reason when a firm is chosen external financing its profit is
decrease by interests which pay for external fund and the interest expenditure has tax
eligibility to deduct from the taxable profit since shareholders joy the tax benefit for
financing their funds on profitable firms than the low profitability firms. Finally,
study concludes that profitability has a positive relationship with leverage in
Srilankan context.

Size has negative relationship with leverage this suggest that when firms are larger
they are going for internal financing rather external finance. Since larger firms are
well established firms and those have high retain earnings when firms have high
retain earnings they are going for internal finance rather external since that study
concludes that there is negative relationship between size and profitability.

Tangibility has a positive relationship with leverage. This suggests that high
tangibility firms are more likely to external for financing their investments than the
low tangibility firms. When firms have more fixed assets they could pledge their
.
assets through that they could barrow more since that here conclude that there is
positive relationship between assets tangibility and leverage.

Growth has a negative relationship with leverage. This suggests that high growth
firms are less likely to debt for financing their investments than the low growth firms.
When firms are highly growth those are more flexible with future investment since
that those firms use equity rather than debt since that here study concludes that there
is negative relationship between growth and leverage.

And accordance with previous chapter Leverage is 87% explained by predicted
variable, those are Profitability, Size, Tangibility and Growth while there is 17% gap
which can be filled by some other factors more than this study has undertaken.

5.3 Conclusion regarding Result and Its Consistency with Condition of Sri
Lankan Capital market.

The findings of this study contribute towards a better understanding of capital
structure decisions in the Sri Lankancontext. This study analyses the factors affecting
the capitalstructure decisions of 40 listed companies from2009 to 2013, and the extent
to which relationship between thesefactors and leverage decisions and what are level
of impaction on leverage. The results of correlation suggest that there is strong
positive relationship between profitability and tangibility of assets with leverage while
size and growth have strong negative relationship with leverage.

There was a strong evidence to support the tradeoff theory by listed companies based
on therelevant determinant of profitability, tangibility and growth variables.
Nevertheless, packing order theory cannot be rejected due totheir correct prediction of
the sign of size variable of companies. Therefore it could be concludedthat
implication of tradeoff theory is more relevant in SriLankan context.

This study has laid some groundwork to explore the factors affecting of capital
structure decision of Sri Lankan listed companies in all 20 sectors, upon which a more
detailed evaluation could be based. Further work is required to develop new
hypotheses for the capital structure decisions of Sri Lankan companies and to design
.
new variables to reflect the institutional influence. A larger, comprehensive, and
detailed database is also required for a further detailed capital structure study.

The following are the major implications related to the debt financing behavior of the
companies in Sri Lankan context.

The average leverage ratio of Sri Lankan companies is around 55%.
Factors other than selected variables could have an influence on leverage
decision.
In Sri Lankan context, implication of tradeoff theory is more relevant than
packing order theory.

5.4 Recommendations and Suggestions for Further Research

Based on the findings and limitations of the research, the following recommendations
can be made for further research:

1.As results show 17% gap in R square, it is recommended to extend Longer sampling
period and to add the number of sample firms, so that it can reach higher R-squared
and adjusted R-squared than the current study.

2.In result of hypotheses testing scatterplot and normal p-p plot indicate that dots are
rarely distributed as data used are limited. Hence, longer sampling period and larger
amount of sample firms are recommended to use in further research.

3.In further research, the other indices are recommended to use as sample, so that
results can be compared.

4.As the purpose of research will not be to produce a theory that is generalizable to all
populations, but will be simply to try to explain what is happening with our research
setting, the Srilankan capital market, therefore, it may be suggested to other
researchers to test the other research settings in a follow-up study.

.
REFERENCE

Akhtar, Shumi and Oliver, Barry, The Determinants of Capital Structure for
Japanese Multinational and Domestic Corporations, Working Paper Series in
Finance, no. 01, (2006 ), 1 28.

Andrade, G., and Kaplan, S., How Costly is Financial (not Economic) Distress?
Evidence from Highly Leveraged Transactions that Became Distressed, Journal of
Finance, (1998), 53, 14431494.

Antweiler, W., and M.Z. Frank, Do U.S. stock markets typically overreact to
corporate news stories?, working paper, UBC and University of Minnesota, (2006).
Agca, Senay and MozumdarAbon, Firm Size, Debt Capacity, and Corporate
Financing Choices, working paper, (2004).

Barclay, M., Morellec, E., Smith Jr., C.W., On the debt capacity of growth options,
The Journal of Business, forthcoming, (2003).

Bulan, Laarni, Subramanian, Narayanan and Tanlu, Lloyd, On the Timing of
Dividend Initiations, Financial Management, forthcoming, (2007).

Bulan and Yan, The Pecking Order of Financing and the Firms Life Cycle, (2007).
Bulan and Yan, The Pecking Order of Financing and the Firms Life Cycle,
Banking and Finance Letters, (2009), 1-16.

Barclay, M. J., and Smith, C. W., and Watts, R. L., The Determinants of Corporate
Leverage and Dividend Policies, Journal of Applied Corporate Finance, 7, (1995), 4,
4-19.

Barclay, M. J. and Smith, C. W., On Financial Architecture: Leverage, Maturity and
Priority, Journal of applied Corporate Finance, 8, (1996), 4, 4-17.

Bernstein, L., and Wild, J.J., Financial Statement Analysis: Theory, Application and
interpretation, (Irwin Mcgraw-hill, 1998).
.
Booth, Laurence, Varouj, Aivazian, AsliDemirguc-Kunt, and Vojislav, Maksimovic,
Capital Structures in Developing Countries, Journal of Finance, (2001), 56, 87-130.

Bradley, Michael, George A. Jarrell, and E. Han Kim, On the existence of an optimal
capital structure: theory and evidence, Journal of Finance, (1984), 39, 857-880.

Burgman, T.A., An empirical examination of multinational corporate capital
structure, Journal of International Business Studies 27, (1996), 3, 553-57.

aglayan and Sak, The Determinants of Capital Structure: Evidence from the
Turkish Banks,,Journal of Money, Investment and Banking, (2010), 15, 1-9.

Chang, Chun, Capital structure as optimal contracts, North American Journal of
Economics and Finance 10, (1999), 2, 363-85.

Chaplinsky, Susan and Greg, Niehaus, Do inside ownership and leverage share
common determinants?, Quarterly Journal of Business and Economics 32, (1993), 4,
51-65.

Chen, C.J.P., Cheng, A., He, N. and Kim, J., An investigation of the relationship
between international activities and capital structure, Journal of International
Business Studies 23, (1997), 3, 563-77.

Chen, Yinghong and Hammes, Klaus, Capital Structure : Theories and Empirical
Results A Panel Data Analysis, CERGUs Project Reports 04, (2003), 1, 1-32.

Chung, K. H., Asset Characteristics and Corporate Debt Policy: An Empirical Test,
Journal of Business Finance and Accounting 20, (1993), 1, 83-98.

Doukas, J.A. and Pantzalis, C., Geographic diversification and agency costs of debt
of multinational firms, Journal of Corporate Finance (2003), 9, 59-92.

.
Drobetz, Wolfgang and Fix, Roger, What are the Determinants of the Capital
Structure ? SomeEvidence for Switzerland, Swiss Journal of Economics and
Statistics Working Paper 4, (2003), 3, 1-38.

Eckbo, B.E., R.W. Masulis, and O. Norli, Security offerings, in B.E. Eckbo, (ed.)
Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 1. In: Handbook
of Finance Series, Chapter 6 (Elsevier/North-Holland, Amsterdam, 2007).

Fama, Eugene, F., and French, Kenneth, Testing tradeoff and pecking order
predictions about divideds and debt, The Center for research in Security Prices
Workinh Paper, 506, (2000).

Fama, E.F. and Jensen, Michael, Agency problem and residual claims, Journal of
Law and Economics, (1983), 26, 327-349.

Fama, E. and K. French, The Corporate Cost of Capital and The Return on Corporate
Investment, Journal of Finance, (1999), 54, 1939-1967.

Frank, Murray, Z. and Goyal, Vidhan, K., Capital structure decisions, Journal of
Financial Economics, (2003), 67, 217-248.

Friend, Irwin, and Larry H.P. Lang, An empirical test of the impact of managerial
self-interest on corporate capital structure, Journal of Finance, (1988), 43, 271-281.
Frank, Murray Z. and VidhanK.Goyal, Testing the Pecking Order Theory of Capital
Structure, Journal of Financial Economics, (2003), 67,217-24.

Ghozali, Imam. AplikasiAnalisis Multivariate dengan Program SPSS.Publishers of
University of Diponegoro, (2002).

Gul, F., Growth opportunities, capital structure and dividend policies in Japan,
Journal of Corporate Finance, (1999), 5, 141-168.

Haugen, R., and L. Senbet, The Insignificance of Bankruptcy Costs to the Theory of
OptimalCapital Structure, Journal of Finance, (1977), 23, 383-393.
.
Hsia, C. C., Coherence of the modern theories of finance, Financial Review,
Winter, (1981), 2742.

Huang, Samuel G. H. and Song, Frank M., The Determinants of Capital Structure:
Evidence from China, HIEBS (Hong Kong Institute of Economics and Business
Strategy) Working Paper,(2002), 1-35.
See at http://www.hiebs.hku.hk/working_papers.

David Edwards,Zhuang J.&Viginita A. Capulong, Asian Development Bank.
Hutchinson, P., The capital structure and investment decision of small owner
managed firm: some exploratory issues, Small Business Economics, (1995), 7, 231
239.

Jensen, Michael C., and William H. Meckling, Theory of the firm: Managerial
Behaviour, agency costs and ownership structure, Journal of Financial Economics,
(1976), 3, 305-360.

Jensen, M.C and Smith, C.W., Shareholders, Managers, and creditor interest:
Applications of agency theory, (1985), (reprinted in Michael C. Jensen. A theory of
the firm: Governance,Residual Claims and Organisational Forms). Harvard University
Prees, (2000), 1-41.

Jensen, M., D. Solberg, and T. Zorn, Simultaneous Determination of Insider
Ownership, Debt and Dividend Policies, Journal of Financial and Quantitative
Analysis, (1992), 27, 247-261.

Kester, Carl W., Capital and Ownership Structure: a Comparison of United States
and Japanese Journal of Financial Management, (1986), 15, 5-16.

Kim, WiSaeng and Eric H. Sorensen, Evidence on the Impact of the Agency Costs of
Debt in Corporate Debt Policy, Journal of Financial and Quantitative Analysis,
(1986), 21, 131-144.

.
Kim, E.H., "A Mean-Variance Theory of Optimal Capital Structure and Corporate
Debt Capacity," Journal of Finance, March, (1978), 33, 45-63.

Kraus, A. and R.H. Litzenberger, "A State Preference Model of Optimal Financial
Leverage," Journal of Finance, September, (1973), 911-922.

Leland, H.E. and Toft., K.B., Optimal Capital structure, endogeneous bankruptcy,
and the term structure of credit spread, Journal of Finance, (1996), 51, 987-1019.

Long, Michael and Ileen, Maltiz, The investment-financing nexus: Some empirical
evidence, Midland Corporate Finance Journal, (1985), 3, 53-59.

Leary, Mark T. and Michael R.Roberts, The Pecking Order, Debt Capacity, and
Information Asymmetry, working paper, (2006).

Michaelas, N. Chittenden, F. and Poutziouris, P., Financial policy and capital
structure choice in UK SMEs: empirical evidence from company panel data, Small
Business Economics, (1999), 12, 113-130.

Miller, Merton, Debt and Taxes, Journal of finance, (1977), 32, 261-78.Milles,
M.B. and Huberman, A.M., Qualitative DataAnalysis : A Sourcebook of New
Methods (2
nd
ed.), (Newbury Park, CA : Sage, 1994).

Mittoo, U. and Zhang, Z., The capital structure of multinational corporations:
Canadian evidence, Working paper, I.H. Asper School of Business, University of
Manitoba, (2005).

Modigliani, Franco, and Merton, Miller, The cost of capital, corporation finance and
the theory of investment, American Economic Review, (1958), 48, 261-275.

Modigliani, Franco, and Merton H. Miller, Corporate income taxes and the cost of
capital, American Economic Review, (1963), 53, 433-443.

.
Morgan, D., Practical strategies for combining qualitative and quantitative methods:
applications to health research, Qualitative Health Research, 8, (1998), 3, 362-376.
Myers, S. C., Determinants of corporate borrowing, Journal of Financial
Economics, (1977), 5, 147-175.

Myers, S.C., The Capital Structure Puzzle, The Journal of Finance, 39, (1984), 3,
575-592.

Myers, Stewart C. and Nicholas S. Majluf, Corporate financing and investment
decisions when firms have information that investors do not have, Journal of
Financial Economics, (1984), 13,187-221.

Pandey, I. M., Capital Structure and the Firm Characterstics: Evidence from an
Emerging Market, IIMA Working Paper, No. 2001-10-04, (2001), 1-19.

Peirson, G., Brown, R, Easton., S. and Howard, P., Business Finance, (McGraw
Hill: Sydney, 2002).

Rajan G. Raghuram, and Luigi, Zingales, What do we know about capital structure?
Some evidence from international data, Journal of Finance, (1995), 50, 1421-1460.

Robson, C., (2002), Real World Research (2nd edn), (Oxford, Blackwell, 2002).
Rogers, C.R., On Becoming a Person, Constable, (London, 1961).

Romano, C. A. Tanewski, G. A. and Smyrnios, K. X., Capital structure decision
making: a model for family business, Journal of Business Venturing, 16, (2000), 3,
285-310.
Ross, S., The Determination of Financial Structure: The Incentive Signalling
Approach, Journal of Economics, (1977), 8, 23-40.

Saunders, Mark, Phillip, Lewis, and Adrian, Thornhill, Research Method for
Business Students (3
rd
ed.), (Prentice Hall, 2003).

.
Shyam-Sunder, Lakshmi and Myers S.C., Testing Static Trade-off against Pecking
Order Models of Capital Structure,, Journal of Financial Economics, (1999), 51, 219-
244.

Smith, H., Strategies of Social Research: The Methodological Imagination,
Englewood Cliffs, NJ, (Prentice-Hall, 1975).

Smith, Clifford and Ross, Watts, The Investment Opportunity Set and Corporate
Financing, Dividend, and Compensation Policies, Journal of Financial Economics,
(1992), 32, 263-292.

Sogorb, Mira F, Lpez-Gracia J., Pecking order versus trade-off: An empirical
approach to the small and medium enterprise capital structure, InstitutoValencianode
InvestigacionesEconmicas (IVIE) working paper, WP-EC 2003-09, (2003), 1-36.

Sbeiti, Wafaa, The Determinants of Capital Structure: Evidence from the GCC
Countries, International Research Journal of Finance and Economics, (2010), 47, 1
27.

Shah and Khan, Determinants of Capital Structure: Evidence from Pakistani Panel
Data, International Review of Business Research Papers Vol. 3 No.4 October,
(2007), 265-282.

Song, Han-Suck, Capital Structure Determinants An Empirical Study of Swedish
Companies, he Royal Institute of Technology,.CESIS, Electronic Working Paper
Series, Paper No. 25, January, (2005), 1-26.

Titman, S. and Wessels, R., The determinants of capital structure choice, The
Journal of Finance, 43, March, (1988), 1, 1-19.Van Horne, James C., Financial
Management and Policy (11
th
Edition), (Prentice Hall, 1998).

Wells, P., Ethics in Business and Management Research, in Wass, V.J. and wells,
P.E. (eds),

.
Whited, Toni M., Debt, Liquidity Constraints, and Corporate Investment: Evidence
from Panel Data, Journal of Finance, (1992), 47, 1425-1460.

.
APPENDICES A
Results ofLeverage calculations
COMPANY NAME 2013 2012 2011 2010 2009
COMMERCIAL BANK OF
CEYLON PLC 1.09 4.60 3.01 2.49 1.83
SAMPATH BANK PLC 0.59 5.45 3.51 1.92 1.41
CARGILLS (CEYLON) PLC 3.92 8.29 7.77 8.50 1.84
CEYLON TOBACCO COMPANY
PLC 14.62 12.04 13.59 17.90 24.78
INDUSTRIAL ASPHALTS
(CEYLON) PLC 9.92 10.86 8.84 14.31 546.91
CIC HOSLDING PLC 5.29 6.49 6.77 7.38 19.20
COLOMBO DOCKYARD PLC 13.26 9.55 8.92 7.59 2.62
LANKEM DEVELOPMENTS PLC 1.06 1.26 1.25 0.78 0.70
JHON KEELS HOLDING PLC 3.12 2.68 2.84 2.20 1.82
HEMAS HOLDING PLC 5.14 48.75 5.12 58.36 19.75
CYLONE LETHER PRODUCT
PLC 9.21 12.32 9.06 5.83 10.88
ODEL PLC 9.13 2.31 3.63 4.65 3.97
NAWALOKA HOSPITALS PLC 3.99 3.01 3.74 1.59 1.67
CYLONE HOSPITALS PLC 3.14 2.41 1.89 2.16 3.63
GALADARI HOTELS (LANKA)
PLC 7.81 0.14 0.16 0.25 1.27
TAJ LANKA HOTELS PLC 3.78 2.47 3.07 1.75 1.77
E-CHANNLING PLC 70.50 58.15 25.56 37.07 51.42
PC HOUSE PLC 6.64 38.90 32.26 3.04 1.54
CYLONE INVESTMENT PLC 474.26 389.75 768.93 177.27 1140.83
COLOMBO INVESTMENT TRUST
PLC 398.47 590.41 639.54 291.40 36.94
CITY HOUSEING AND REAL
ESTATE CO. PLC 5.22 0.20 0.20 0.29 56.67
COLOMBO LAND &
DEVELOPMENT COMPANY PLC 2.31 3.98 319.69 610.38 748.32
SINGER INDUSTRIES (CYLONE)
PLC 16.63 19.24 18.81 15.45 11.64
ROYAL CERAMICS LANKA PLC 4.84 4.19 7.44 7.25 3.38
LANKA ASHOK LAYLAND PLC 57.93 79.34 54.99 27.40 26.28
DIESEL & MOTOR
ENGINEERING PLC 7.17 7.04 7.43 3.18 2.41
INDO MALAY PLC 107.06 120.43 95.79 84.23 73.70
GOOD HOPE PLC 77.05 81.84 94.54 99.39 88.66
BOGAWANTHALAWA TEA
ESTATE 0.50 0.30 0.52 0.41 0.41
TALAWAKELLA TEA ESTATE
PLC 0.88 0.80 0.61 0.73 0.59
LANKA IOC PLC 280.03 258.03 225.95 180.02 330.51
LAUGFS GAS PLC 3.23 3.47 9.84 2.75 2.80
MERCENTILES SHIPPING
COMPANY PLC 0.05 0.09 0.10 0.10 0.18
CYLONE TEA BROKERS PLC 17.40 3.44 2.73 6.82 3.40
COLOMBO CITY HOLDING PLC 44.68 23.74 28.74 21.04 22.58
.
E B CREASY & COMPANY 1.22 1.37 1.30 0.96 0.86
DIALOG AXIATA PLC 2.57 1.57 1.37 1.04 4.25
SRILANKA TELECOME PLC 2.75 2.67 2.78 3.79 3.84
BROWN & COMPANY PLC 6.84 7.76 12.26 5.90 4.41
EASTERN MERCHANTS PLC 11.89 13.19 49.60 53.54 6.56
APPEN

Extract from MS-excel 2010

.
APPENDICES B
Results of Profitability calculation
COMPANY NAME 2013 2012 2011 2010 2009
COMMERCIAL BANK OF CEYLON
PLC 0.02 0.03 0.03 0.03 0.02
SAMPATH BANK PLC 0.01 0.03 0.02 0.02 0.03
CARGILLS (CEYLON) PLC 0.06 0.06 0.07 0.07 0.07
CEYLON TOBACCO COMPANY PLC 1.01 0.91 0.81 0.67 0.65
INDUSTRIAL ASPHALTS (CEYLON)
PLC 0.02 0.03
-
0.03 -0.02 0.05
CIC HOSLDING PLC 0.01 0.06 0.08 0.07 0.05
COLOMBO DOCKYARD PLC 0.05 0.11 0.12 0.13 0.17
LANKEM DEVELOPMENTS PLC 0.03 0.07 0.12 0.06 0.03
JHON KEELS HOLDING PLC 0.10 0.10 0.10 0.07 0.07
HEMAS HOLDING PLC 0.09 0.05 0.08 0.06 0.06
CYLONE LETHER PRODUCT PLC 0.02 0.02 0.04 0.05 -0.03
ODEL PLC 0.03 0.06 0.11 0.08 0.07
NAWALOKA HOSPITALS PLC 0.08 0.07 0.23 0.05 -0.02
CYLONE HOSPITALS PLC 0.07 0.07 0.05 0.04 0.06
GALADARI HOTELS (LANKA) PLC 0.02 -0.05
-
0.02 0.00 -0.04
TAJ LANKA HOTELS PLC 0.08 0.04 0.00 -0.02 -0.06
E-CHANNLING PLC 0.21 0.35 0.09 0.04 -0.10
PC HOUSE PLC -0.20 0.02 0.11 0.12 0.03
CYLONE INVESTMENT PLC 0.14 0.14 0.16 0.21 0.08
COLOMBO INVESTMENT TRUST PLC -0.08 0.10 0.13 0.07 0.07
CITY HOUSEING AND REAL ESTATE
CO. PLC 0.04 0.01
-
0.07 -0.07 -0.02
COLOMBO LAND & DEVELOPMENT
COMPANY PLC 0.00 0.08 0.15 0.00 0.00
SINGER INDUSTRIES (CYLONE) PLC 0.02 0.04 0.05 0.11 -0.06
ROYAL CERAMICS LANKA PLC 0.10 0.24 0.25 0.18 0.06
LANKA ASHOK LAYLAND PLC 0.08 0.26 0.35 0.15 0.07
DIESEL & MOTOR ENGINEERING PLC -0.03 0.24 0.31 0.08 0.03
INDO MALAY PLC -0.02 0.03 0.11 0.12 0.05
GOOD HOPE PLC 0.03 0.03 0.15 0.12 0.08
BOGAWANTHALAWA TEA ESTATE 0.09 -0.07 0.02 0.04 -0.04
TALAWAKELLA TEA ESTATE PLC 0.05 0.07
-
0.03 0.04 -0.01
LANKA IOC PLC 0.12 0.04 0.05 -0.02 -0.05
LAUGFS GAS PLC 0.12 0.11 0.12 0.09 0.09
MERCENTILES SHIPPING COMPANY
PLC -0.04 -0.01
-
0.01 0.02 -0.08
CYLONE TEA BROKERS PLC 0.05 0.07 0.07 0.06 0.04
COLOMBO CITY HOLDING PLC 0.04 0.08 0.03 0.03 0.18
E B CREASY & COMPANY 0.03 0.08 0.10 0.06 0.03
DIALOG AXIATA PLC 0.04 0.08 0.08 -0.16 -0.03
SRILANKA TELECOME PLC 0.07 0.06 0.07 0.07 0.02
.
BROWN & COMPANY PLC 0.01 0.10 0.13 0.07 0.03
EASTERN MERCHANTS PLC -0.01 0.07 0.02 0.05 -0.05


.
APPENDICES C
Results of Size calculation
COMPANYNAME 2013 2012 2011 2010 2009
COMMERCIALBANKOFCEYLON
PLC 18.11 17.96 17.63 17.54 17.59
SAMPATHBANKPLC 17.66 17.47 17.10 17.01 17.04
CARGILLS(CEYLON)PLC 17.83 17.69 17.43 17.25 17.17
CEYLONTOBACCOCOMPANYPLC 18.31 18.23 18.15 17.97 17.88
INDUSTRIALASPHALTS(CEYLON)
PLC 18.01 18.13 18.02 17.95 18.10
CICHOSLDINGPLC 16.99 16.93 16.86 16.63 16.57
COLOMBODOCKYARDPLC 16.63 16.61 16.37 16.49 16.42
LANKEMDEVELOPMENTSPLC 17.02 17.00 16.95 16.22 16.09
JHONKEELSHOLDINGPLC 18.26 18.16 17.92 17.69 17.53
HEMASHOLDINGPLC 17.08 22.23 23.62 21.78 22.31
CYLONELETHERPRODUCTPLC 22.37 22.20 20.77 20.15 19.72
ODELPLC 22.23 22.06 21.92 21.60 21.42
NAWALOKAHOSPITALSPLC 22.16 22.03 21.90 21.78 21.64
CYLONEHOSPITALSPLC 22.07 21.96 21.84 21.62 21.50
GALADARIHOTELS(LANKA)PLC 21.14 21.27 20.98 20.75 20.41
TAJLANKAHOTELSPLC 21.39 21.22 21.04 20.65 20.45
ECHANNLINGPLC 18.75 18.30 17.93 17.74 17.47
PCHOUSEPLC 21.37 22.05 15.15 21.83 20.46
CYLONEINVESTMENTPLC 13.01 13.59 14.17 13.88 13.77
COLOMBOINVESTMENTTRUST
PLC 10.00 9.65 16.72 16.15 16.17
CITYHOUSEINGANDREAL
ESTATECO.PLC 20.64 20.82 20.58 20.09 20.71
COLOMBOLAND&
DEVELOPMENTCOMPANYPLC 11.56 11.46 11.39 11.41 11.43
SINGERINDUSTRIES(CYLONE)
PLC 20.19 20.43 20.39 20.31 20.01
ROYALCERAMICSLANKAPLC 21.55 21.50 21.50 21.15 21.08
LANKAASHOKLAYLANDPLC 23.08 23.55 23.17 21.95 21.68
DIESEL&MOTORENGINEERING
PLC 17.14 17.50 17.20 16.17 16.04
INDOMALAYPLC 12.12 12.41 12.39 12.31 11.67
GOODHOPEPLC 12.44 12.38 12.32 12.46 12.02
BOGAWANTHALAWATEAESTATE 21.98 21.84 22.06 21.99 21.77
TALAWAKELLATEAESTATEPLC 15.08 15.00 21.71 21.78 21.64
LANKAIOCPLC 25.04 24.82 24.67 24.64 24.59
LAUGFSGASPLC 23.08 22.94 22.71 22.44 22.41
MERCENTILESSHIPPING
COMPANYPLC 20.15 20.23 20.21 19.99 19.38
CYLONETEABROKERSPLC 19.13 19.04 19.44 19.18 19.08
COLOMBOCITYHOLDINGPLC 18.32 18.58 18.75 18.72 18.65
.
EBCREASY&COMPANY 17.19 16.00 17.08 16.45 16.34
DIALOGAXIATAPLC 17.85 17.64 14.17 17.39 17.40
SRILANKATELECOMEPLC 11.00 10.95 10.84 10.82 10.78
BROWN&COMPANYPLC 16.47 16.48 16.31 16.01 15.73
EASTERNMERCHANTSPLC 14.72 15.35 15.61 15.17 14.81


.
APPENDICES D
Results of tangibility calculation
COMPANYNAME 2013 2012 2011 2010 2009
COMMERCIALBANKOFCEYLONPLC 0.03 0.04 0.03 0.03 0.03
SAMPATHBANKPLC 0.03 0.03 0.02 0.03 0.03
INDUSTRIALASPHALTS(CEYLON)PLC 0.52 0.45 0.47 0.35 0.37
CICHOSLDINGPLC 0.37 0.35 0.37 0.33 0.34
CYLONELETHERPRODUCTPLC 0.56 0.52 0.46 0.71 0.69
ODELPLC 0.41 0.59 0.58 0.62 0.65
ECHANNLINGPLC 0.48 0.38 0.22 0.24 0.33
PCHOUSEPLC 0.22 0.19 0.23 0.37 0.31
COLOMBOINVESTMENTTRUSTPLC 0.77 0.01 0.02 0.96 0.14
CITYHOUSEINGANDREALESTATECO.
PLC 0.11 0.05 0.02 0.01 0.02
COLOMBOLAND&DEVELOPMENT
COMPANYPLC 0.98 0.95 0.94 0.94 0.92
SINGERINDUSTRIES(CYLONE)PLC 0.68 0.68 0.66 0.54 0.78
DIESEL&MOTORENGINEERINGPLC 0.44 0.30 0.28 0.39 0.42
INDOMALAYPLC 0.98 0.52 0.54 0.61 0.63
GOODHOPEPLC 0.99 0.98 0.83 0.90 0.94
LANKAIOCPLC 0.34 0.38 0.44 0.47 0.41
LAUGFSGASPLC 0.70 0.62 0.60 0.72 0.73
MERCENTILESSHIPPINGCOMPANYPLC 0.95 0.96 0.95 0.94 0.91
.


.
APPENDICES E
Results of growth calculation
COMPANYNAME 2013 2012 2011 2010 2009
COMMERCIALBANKOFCEYLONPLC 0.16 0.14 0.16 0.13 0.13
SAMPATHBANKPLC 0.19 0.21 0.24 0.16 0.11
INDUSTRIALASPHALTS(CEYLON)PLC 0.18 0.02 0.10 0.03 0.08
CICHOSLDINGPLC 0.10 0.23 0.20 0.13 0.13
CYLONELETHERPRODUCTPLC
(0.01)
0.14
0.72
0.00
0.23
ODELPLC 0.45 0.08 0.25 0.13 0.15
ECHANNLINGPLC 0.20 0.62 0.19 0.08 0.15
PCHOUSEPLC 0.15 0.14 0.36 0.17 0.01
COLOMBOINVESTMENTTRUSTPLC 0.91 0.04 0.05 0.00 0.26
CITYHOUSEINGANDREALESTATECO.
PLC 0.67 0.39 0.78 0.21 0.24
COLOMBOLAND&DEVELOPMENT
COMPANYPLC 0.05 0.11 0.17 0.00 0.01
SINGERINDUSTRIES(CYLONE)PLC 0.01 0.10 0.19 0.24 0.04
DIESEL&MOTORENGINEERINGPLC 0.20 0.29 0.49 0.05 0.11
INDOMALAYPLC 0.02 0.03 0.11 0.12 0.05
GOODHOPEPLC 0.05 0.05 0.01 0.08 0.10
LANKAIOCPLC 0.10 0.14 0.06 0.15 0.17
LAUGFSGASPLC 0.00 0.15 0.31 0.06 0.32
MERCENTILESSHIPPINGCOMPANY
PLC 0.10 0.04 0.05 0.46 0.29
.


.
APPENDICES G
Spss 17. Results sheet of study variables

Descriptive Statistics

Mean Std. Deviation N
LEVERAGE 55.2965 123.75326 40
PROFITABILITY .0920 .12869 40
SIZE 16.4613 3.37161 40
TANGIBILITY .0730 .05130 40
GROWTH .1288 .13518 40

Correlations

LEVERAGE PROFITABILITY SIZE TANGIBILITY GROWTH
Pearson Correlation LEVERAGE 1.000 .876 -.598 .662 -.769
PROFITABILITY .876 1.000 -.614 .672 -.917
SIZE -.598 -.614 1.000 -.920 .829
TANGIBILITY .662 .672 -.920 1.000 -.854
GROWTH -.769 -.917 .829 -.854 1.000
Sig. (1-tailed) LEVERAGE . .000 .000 .000 .000
PROFITABILITY .000 . .000 .000 .000
SIZE .000 .000 . .000 .000
TANGIBILITY .000 .000 .000 . .000
GROWTH .000 .000 .000 .000 .
N LEVERAGE 40 40 40 40 40
PROFITABILITY 40 40 40 40 40
SIZE 40 40 40 40 40
TANGIBILITY 40 40 40 40 40
GROWTH 40 40 40 40 40

.

Variables Entered/Removed
Model Variables Entered Variables Removed Method
1 GROWTH, SIZE,
TANGIBILITY,
PROFITABILITY
a

. Enter
a. All requested variables entered.

Model Summary
b

Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .936
a
.875 .861 46.13902
a. Predictors: (Constant), GROWTH, SIZE, TANGIBILITY,
PROFITABILITY
b. Dependent Variable: LEVERAGE

ANOVA
b

Model Sum of Squares df Mean Square F Sig.
1 Regression 522771.633 4 130692.908 61.392 .000
a
Residual 74508.317 35 2128.809

Total 597279.949 39

a. Predictors: (Constant), GROWTH, SIZE, TANGIBILITY, PROFITABILITY
b. Dependent Variable: LEVERAGE

.

Coefficient Correlations
a

Model GROWTH SIZE TANGIBILITY PROFITABILITY
1 Correlations GROWTH 1.000 -.502 .268 .916
SIZE -.502 1.000 .589 -.465
TANGIBILITY .268 .589 1.000 .112
PROFITABILITY .916 -.465 .112 1.000
Covariances GROWTH 72204.097 -873.192 29402.755 47661.382
SIZE -873.192 41.974 1556.649 -583.504
TANGIBILITY 29402.755 1556.649 166171.404 8852.746
PROFITABILITY 47661.382 -583.504 8852.746 37469.620
a. Dependent Variable: LEVERAGE

Residuals Statistics
a

Minimum Maximum Mean Std. Deviation N
Predicted Value -44.9290 618.2804 55.2965 115.77738 40
Std. Predicted Value -.866 4.863 .000 1.000 40
Standard Error of Predicted
Value
7.654 45.835 14.835 6.871 40
Adjusted Predicted Value -50.7926 2729.3181 107.4595 431.03723 40
Residual -92.30045 152.54539 .00000 43.70892 40
Std. Residual -2.000 3.306 .000 .947 40
Stud. Residual -5.311 3.545 -.111 1.324 40
Deleted Residual -2139.10815 176.18750 -52.16303 342.28216 40
Stud. Deleted Residual -11.881 4.364 -.240 2.224 40
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig. B Std. Error Beta
1 (Constant) -101.652 117.898

-.862 .394
PROFITABILITY 1687.617 193.571 1.755 8.718 .000
SIZE -15.390 6.479 -.419 -2.375 .023
TANGIBILITY 1001.714 407.641 .415 2.457 .019
GROWTH 1412.800 268.708 1.543 5.258 .000
.
Mahal. Distance .098 37.513 3.900 6.126 40
Cook's Distance .000 424.250 10.643 67.074 40
Centered Leverage Value .003 .962 .100 .157 40

.

.

Dessertation 25

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Dessertation 25

Hochgeladen von

Copyright:

Verfügbare Formate

FACTORS AFFECTING CAPITAL STRUCTURE

Das könnte Ihnen auch gefallen