Abstract:
Capital structure decisions are important in achieving the performance of firms. These decisions affect the
firms’ cost of capital, capital budgeting decisions, and firm value. Financing decisions are one of the most
critical areas for finance managers. It has a direct impact on capital structure and financial performance of
the companies. It has always been an area for interest for researchers to understand the relationship
between capital structure and financial performance of the company. This paper investigates the impact of
capital structure on financial performance based on the data concerning nine (09) listed plantation
companies in Sri Lanka dining the five year period ranging from 2007 to 2011. The study measures
financial performance in terms of Return on Equity (ROE) and Earning Per Share (EPS) where as capital
structure is measured in terms of Debt to Equity Ratio (DER), Total Debt Ratio (TDR) and Debt to Total
Assets (DTA). Based on the Regression Analysis, the study indicates that ROE and EPS have been positively
affected by the capital structure and considering the R2 values, capital structure variables; TDR, DER and
DTA affect to the firms’ financial performance between 15% - 30%. Therefore, the financial managers should
make trustful decisions concerning the capital structure changes
