Determinants of Capital Structure: Evidence from Hotel and Restaurant Companies in Sri Lanka

Alagathurai Ajanthan · Sri Santhi Lanka

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Purpose – The aim of this study is to find out the factors that affect the capital structure of hotels and restaurant companies and to investigate whether the capital structure models derived from Western settings provide convincing explanations for capital structure decisions of the Sri Lankan companies. Methodology – Different conditional theories of capital structure are reviewed (the trade-off theory, pecking order theory and agency theory) in order to formulate working hypotheses concerning the determinants of capital structure of the hotels and restaurant companies. The investigation is performed for a sample of 15 companies listed on the Colombo Stock Exchange during 2008-2012. Findings – The results suggest that only profitability is negatively related to the debt ratios (long term; short term and total debt) whereas tangibility (asset structure), size and growth do not appear to be significantly related to the debt ratios. Through the findings we can come to conclusion that Pecking order theory is more relevant to Sri Lankan context. Practical implications – This study has laid some groundwork to investigate the determinants of capital structure of Sri Lankan companies upon which a more detailed evaluation could be based. Furthermore, findings should help corporate managers and decision makers to make optimal capital structure decisions. Originality/value – To the authors' knowledge, this is the first study that investigates the determinants of capital structure of hotels and restaurant companies in Sri Lanka. Furthermore, this study somehow goes to confirm that same factors affect the capital structure decisions of firms in developing countries as identified for firms in developed economies.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1984The Capital Structure Puzzle 1995What Do We Know about Capital Structure? Some Evidence from International Data 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1980Optimal capital structure under corporate and personal taxation 2005The determinants of capital structure: Evidence from China

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2018DETERMINANTS OF CAPITAL STRUCTURE: EMPIRICAL EVIDENCE FROM TRADITIONAL AIRLINES 2019Revisiting External Pecking Order Hypothesis: Evidence from Sri Lankan Companies Capital Structure

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