Effects of Capital Structure on Firms’ Financial Performance: Evidence from Listed Plantation Companies of Colombo Stock Exchange (CSE) in Sri Lanka

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