Abstract:
The purpose of this study is to identify the factors which
determine the level of debt financing over the equity financing of
the non-financial companies in Sri Lanka. The study is conducted
on a sample of 30 companies from non-finance companies listed
on the Colombo Stock Exchange (CSE). The sample consists of
20 companies that are selected based on the highest market
capitalization and 10 companies which have issued debentures in
the market. The data are obtained from the annual reports of
sample companies for the years 2015 to 2018 for this purpose. A
panel data regression analysis is conducted to analyze whether the
firm performance, age, size, agency cost of debt, tangibility, sales
growth, liquidity, and tax shield have an impact on the debt
financing decisions of the firm. The pecking order theory, agency
theory, and trade-off theory are used to explain the impact of
determinants on debt financing. The findings of the analysis show
that the firm performance, size, liquidity, tangibility, sales
growth, and agency cost of debt have generated an inverse
association with the firm leverage. Age and non-debt tax shield
positively correlated with leverage according to the analysis.
Findings are in line with the hypotheses developed except for firm
size, tangibility, and non-debt tax shield. The size of the firm and
tangibility deviate from the hypotheses developed while the nondebt tax shield is found to be insignificant in influencing its
decision to apply for financing. This research has provided the
basis to explore the determinants of debt financing in the overall
capital structure of Sri Lankan firms. The results are useful for
the managers and the policymakers to have knowledge about the
firm-specific determinants of debt financing, and it should help
corporate managers to make optimal capital structure decisions.
This study contributes to enhancing the existing literature by
analyzing the impact of determinants of debt financing in listed
non-financial companies in Sri Lanka.
