Factors Influencing Companies’ Leverage: Evidence from Listed Manufacturing Companies in Sri Lanka

Abstract

The purpose of this study was to find the factors that influence on financial leverage of Sri Lankan listed manufacturing companies. The sample covered 33 manufacturing companies listed in Colombo Stock Exchange (CSE) and the analysis was based on the year end observations of five years from 2011-2015. Panel data analysis was used and profitability, tangibility, growth rate, and firms’ size were analyzed as the determinants of the companies’ financial leverage. Tangibility significantly impact on long term leverage; Profitability and Firm’s Size was confirmed to be a relevant determinant to total leverage. More profitable companies would tend to have fewer debts, since they use the retained earnings rather than debts. This evidence is support to the pecking order theory. High growth firms are more likely to use long-term leverage. These companies use more short term loans than long term loans. The lack of developed long-term debt market may be the main reason for this situation in Sri Lanka.