The influence of corporate governance on capital structure decisions of listed companies in Sri Lanka

Abstract

Unlike in mature markets, scant attention has been paid to investigate the relationship between corporate governance and capital structure in emerging markets. This study aims to fill this research gap by undertaking an empirical study in the Colombo Stock Exchange in Sri Lanka. Following the notions of agency, stewardship and stakeholder theories, corporate governance variables have been hypothesized to investigate their influences on capital structure measured using total debt-to-equity ratio. The corporate governance variablesconsidered in the study are number of meeting held during the year, board independence, managerial and institutional ownerships. Data for the period of 5 years between 2008 and 2012 were gathered in relation to 30 manufacturing companies listed on the Colombo Stock Exchange. The study finds that 37.4 per cent of assets of the Sri Lankan listed manufacturing companies are financed by debt. Further, the study finds evidence to accept all the hypotheses at 5 per cent significance level. The study also investigates the influence of capital structure on firm value measured using Tobin's Q by developing a fifth hypothesis, which also has been accepted at 5 per cent significance level. The study has both theoretical and practical implications. While it finds evidence to generalize the notions of the three theories employed in the study, it also reveals how corporate governance variables influence capital structure decisions and firm value in the manufacturing companies in Sri Lanka.