DETERMINANTS OF DEBT FINANCING: AN EMPIRICAL ANALYSIS OF NON-FINANCIAL LISTED COMPANIES IN SRI LANKA

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.