Capital Structure and Firm Value: Evidence from Listed Food, Beverage and Tobacco Companies in Sri Lanka.

Abstract

This study examines the relationship between capital structure and the firm value of listed Food, Beverage and Tobacco (FBT) companies on the Colombo Stock Exchange (CSE) during 2020-2024. The study is motivated by the conflicting predictions of capital structure theories and by the macroeconomic shocks Sri Lanka faced, such as the COVID-19 pandemic and the 2022 economic crisis. The study design was explanatory and quantitative, using secondary data drawn from the audited annual reports of 25 sampled companies and CSE market data over a five-year balanced panel, producing 125 firm-year observations. Firm value was measured using Tobin's Q ratio, capital structure was measured as total liabilities to total assets, and the control variables were profitability, firm size and asset tangibility. The panel data were analysed using EViews, and the Hausman test indicated that the Random Effects Model is the best estimator. Panel Estimated Generalized Least Squares (EGLS) results indicate that capital structure is significantly and negatively related to firm value, while profitability and firm size are significantly and positively related to firm value; asset tangibility is not statistically significant. The model accounts for about 73.7 per cent of the variation in firm value, showing that financing decisions, profitability and firm scale are key determinants of market value in Sri Lanka's FBT sector. Findings have implications for the current financing situation in Sri Lanka's FBT sector, which is capital-intensive, in the face of macroeconomic instability, for current managers of the companies, investors and policymakers.