The Impact Of Capital Structure On Firm’s Performance

This research study presents empirical findings of the impact of capital structure on firm’s performance. The main purpose of this study is to investigate the overall impact of capital structure with the institutional variables on Sri Lankan listed firm’s performance by creating the relationship which exists between the capital structure with institutional variables and performance measures of Sri Lankan listed firms. Here, size, growth and tax are included in to the institutional factors and return on assets (ROA), return on equity (ROE), Tobin’s Q and earning per share (EPS) are included in to the firms’ performance.The study used three estimation models of ordinary least squares estimation, Random-effect estimation and Fixed-effect estimation.This empirical analysis reveals some support to the pecking order and static tradeoff theories of capital structure based on2008to2012data for220quoted firms in Sri Lanka. All three Capital structure measures have not any significant impact on the firm’s accounting performance measures (ROA and ROE). An attractive finding is that all three leverage measures have a positive significant relationship with the Tobin’s Q market performance measure whereas a negative significant relationship with earning per share. The size, growth and tax of the firm have an insignificant effect on the accounting performance measures (ROA and ROE). The Tobin’s Q performance measure affected negatively by size and growth and positively by tax. Whereas, EPS performance measure positively affected by size and tax and negatively by growth in Sri Lanka.This research explores the impact of capital structure on the firm’s performance of Sri Lankan listed firms, moreover that observed findings could assist the corporate sector management as well as policy makers to take appropriate decisions in this fields.And make recommendations as firms should try to reduce rely on short term finance sources and increase long term debt in their respective capital structure choices, and should focus on developing more internal strategies that can help to improve their accounting performance.Based on the knowledge of authors, this is the first study that reveals the impact of capital structure on the firm’s performance of all Sri Lankan listed firms. Further, impact of capital structure on firm’s performance is misty; hence this study employed for continuing that search with the help of Sri Lankan listed firms’ data.