structure and firm performance
special reference to listed Manufacturing firms in Sri Lanka
MF /2013/3649 H.K.T.Dilhara
ACC 4113: Research
Course Coordinator: Dr. MK Wanniarachchige
Due Date: 12th
Office Use Only
Department of Accounting and Finance
Faculty of Management and Finance
University of Ruhuna
I hereby certify that
the material presented in this report is original and no other persons’ work or
ideas have been used without acknowledgement.
MF/2013/3649 H.K.T. Dilhara
Submission Date: 12
take this opportunity to thank all people who made a contribution in my
academic life so far. I would like to express heartiest gratitude to my
research supervisor, Senior Lecturer, Mrs.M.S.Nanayakkara for her guidance,
support and advices given in carrying out the research work, I would also like
to express my gratitude to Dr. MK
Wanniarachchigethe course coordinator of research methodology. And also
I would like to thank my loving parents, brothers and my friends who were with
me in this task such as in every other occasion and my friends always encourage
me a lot.
Table of Contents
CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE.. 3
3.1. Topic. 3
3.2. Topic. 3
3.3. Topic. 4
3.4. Topic. 4
3.5. Topic. 4
3.6 .Topic. 5
3.7. Topic. 5
3.8. Topic. 6
3.9. Topic. 6
3.10. Topic. 6
3.11. Topic. 7
3.12. Topic. 7
structure decision is critical for every business. It deals with how firm
should obtain funds for their operations. It means long term financing .The
firms face the problem of deciding whether Debt finances or equity financing is
Stakeholders of every company willing to
know about financial performance. They consider about firm’s return on
investment, return on assets, Annual turnover and value added, etc. The firm
performance is affected by many factors such as capital structure, liquidity,
the size of the firm, Age of the company etc. Many researchers have done based
on the relationship between capital structure and firm performance. But there
is no consensus among researchers about whether there is a positive or negative
research investigates on finding the relationship among capital structure and
firm performance using 30 listed manufacturing firms in Sri Lanka over 2012 to
2016. Debt to equity ratio is the indicator for measuring capital structure and
it is the independent variable. The dependent variable is financial performance
and return on equity, return on assets and earnings per share are the
indicators for measuring it.
CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE
3. Annotated Bibliography
Tailab, M. M. K.
(2014). The effect of capital structure on profitability of energy American
firms. International Journal of Business
and Management Invention, 3(12), 54-61.
This research was conducted to find the
effect of capital structure on firm’s financial performance. Capital structure measured
using short term debt, long term debt, total debt, debt to equity ratio. The
dependent variable was financial performance and the indicators which used to
measure this were return on assets (ROA), and return on equity (ROE). The data
obtained from 2005-2013 financial statements of 30 energy American firms. Smart
PLS (Partial Least Square) version 3 technique was used to analyze the data.
Findings revealed that there was a negative association between total debt and
Cole, C., Yan,
Y., & Hemley, D. (2015). Does Capital Structure Impact Firm Performance: An
Empirical Study of Three US Sectors. Journal
of Accounting and Finance, 15(6), 57.
This study investigates the
association between capital structure and firm performance. 30 United States
firms from Industrial, Healthcare, and Energy Sector were selected and observed
300 observations per sector. They used the data for 2004 -2013 in annual
reports and the Yahoo
used Regression technique to analyze data. The findings concluded that the
negative association between return on assets and operating return among
industrial, healthcare and energy sector. Moreover they found that capital
structure has positive, negative and no association on profit margin on industrial,
energy and healthcare sector respectively.
Nasimi, A. (2016). Effect of Capital Structure on Firm Profitability (An
Empirical Evidence from London, UK). Global
Journal of Management And Business Research.
This research was carried out to find the
effect of capital structure on firm profitability. Data has been collected on 30
firms out of top 100 companies listed in FTSE-100 index using financial reports
for the period between 2005 -2014. Correlation and regression analysis techniques
were used to analyze data. Research found that there was a significant effect
of capital structure on firm performance and when the value of debt was high
then the tax benefits were also high.
A., Biger, N., & Mathur, N. (2011). The effect of capital structure on
profitability: Evidence from the united states. International Journal of Management, 28(4), 3.
This research examined the effect of capital structure on firm
profitability. The sample consists with 272 listed American service and
manufacturing firms in New York Stock Exchange for the period of 2005-2007 from
out of approximately 500 financial-reports announced by public companies
.Correlations and regression techniques were used to analyze data. The research
found that most profitable firms depend on debt financing because of interest
on debt is tax deductible .further research concluded that the manufacturing
firms in US should more concern about the capital structure because debt increases the possibility of bankruptcy of
Skopljak, V., & Luo, R. (2012).
Capital structure and firm performance in the financial sector: Evidence from
australia. Asian Journal of Finance &
Accounting, 4(1), 278-298.
This paper examined on how capital
structure affect firm performance .The sample consisted 15 authorized deposit taking institutions in
Australia over the period of 2005-2007. The data was obtained from OSIRIS
database, financial statements and from Australian prudential regulatory
Authority (APRA).Regression technique used to analyze data. Research concluded
that there was a rigid relationship between firm performance and capital
structure among Australian financial institutions. At relatively low levels of
leverage there was a positive relationship between debt and profit efficiency
.When there was high level of leverage the relationship was negative.
Antoniou, A., Guney, Y., & Paudyal, K.
(2002). The determinants of corporate
capital structure: Evidence from european countries: University of Durham,
Department of Economics and Finance.
This research investigated the determinants
of leverage ratio and used the data of British, German and French non financial
firms listed in the stock exchange in these three countries for the periods of
1969-2000.Autoregressive distributed-lag model, and Generalized Methods of
Moments (GMM) used for analyzing data. Research revealed that there is a
positive relationship between leverage ratio and size of the firm. Also there
is a negative association between market to book ratio, term-structure of
interest rates and share price performance in all sample countries.
Schulz, T. (2017). The impact of capital structure on firm performance: an investigation
of Dutch unlisted SMEs. University of Twente.
This research was conducted to find out the
effect of capital structure on firm performance. The Data collected from Small
and medium-sized enterprises in Netherlands for 2008-2015. Indicators which
used to measure the performance were return on assets (ROA) and return on
capital employed (RCOE). The total leverage and the combination of long-term
and short-term obligations in proportion to total assets were the indicators
for measuring capital structure. The research revealed that there was a
significant negative relationship between capital structure and ROA and RCOE.
V?tavu, S. (2015). The impact of capital structure on financial
performance in Romanian listed companies. Procedia
Economics and Finance, 32, 1314-1322.
This research investigated the
relationship between Capital structure and financial performance using
2003-2010 data of 196 manufacturing companies listed on Bucharest Stock
Exchange in Romania. Cross sectional regressions method were used to analyze
data. Financial performance indicators were return on assets and return on
equity. Debt ratios and equity ratios were used as indicators for measuring
capital structure. Research found most profitable companies were using higher
amount of equity more than debt. When the total debt increased Return on assets
and return on equity goes down. More over taxes highly affect the equity and
Cortez, M. A.,
& Susanto, S. (2012). The determinants of corporate capital structure:
evidence from Japanese manufacturing companies. Journal of International Business Research, 11(3), 121.
This research was carried out to find out
the factors that influence the financing decision on Japanese Manufacturing
Companies. The study used 21 Manufacturing Companies listed in the Tokyo Stock
Exchange and data collected from the Business Industry Database for 2001 to
2010 periods. Correlation coefficient technique and qualitative approach used
to analyze data. Research revealed that tangibility and profitability were
statistically significant in determining financing decision.
Salim, M., & Yadav, R. (2012). Capital structure and firm
performance: Evidence from Malaysian listed companies. Procedia-Social and Behavioral Sciences, 65, 156-166.
This paper investigated the association
between capital structure and firm performance using the data of financial
statements prepared for 1995-2011 in
237 listed companies in Bursa Malaysia Stock exchange. These 237 firms
were selected from construction, plantation, consumer product, property, and
transportation fields. Regression technique was used to analyze data. The
research revealed that there was a negative relationship between the dependent
and independent variables.
Njeri, M., &
Kagiri, A. W. (2015). Effect of Capital Structure on Financial Performance of
Banking Institutions Listed in Nairobi Securities Exchange. International Journal of Science and
Research, 4 (7), 924-930
paper examined how debt, leverage risk, Interest rate and debt equity
combinations affect for firm performance in banking institutions listed in
Nairobi Securities Exchange. Data collected using questionnaires from 30
responses out of 35 respondents. Data analysis technique were correlation and
multiple regressions. Research found firm performance and association between
debts, leverage risk, interest rate was positive and 56.4% of financial
performance of listed Commercial banks at the NSE can predetermined using
& Nimalthasan, P. (2013). Capital structure and its impact on firm
performance: A study on Sri Lankan listed manufacturing companies.
This research examined the impact of capital
structure on firm performance. The data collected from the annual reports of
2008-2012 using 25 listed manufacturing firms. The indicators for measuring
firm performance were Gross profit, net profit, returns on equity and return on
assets. The independent variable was capital structure and it was measured
using debt equity and debt assets ratio.
Descriptive analysis, Correlation analysis and regression analyze
techniques used to analyze data. The results showed that leverage and return on
equity has negative relationship.
performance is determined by many factors. More researchers have done based on
finding the effect on capital structure on firm performance. Researchers found
that there was a negative association and some findings revealed that there was
no any relationship. However some researchers concluded that there was a
significant positive relationship between these two variables. Most researches
concentrated on the benefits regarding debt financing.