Capital structure and firm performance in emerging economies: an empirical analysis of Sri Lankan firms

Abstract

This paper offers an empirical analysis of the impact of capital structure on firm performance in the context of an emerging market-Sri Lanka. The study applies both pooled and panel data regression models for a sample of 155 Sri Lankan-listed firms. The results demonstrate that most of the Sri Lankan firms finance their operations with short-term debt capital as against the long-term debt capital and provide strong evidence that the firm performance is negatively affected by the use of debt capital. The study also finds a significant negative relationship between tangibility and performance indicating inefficient utilization of non-current assets. The negative performance implications associated with over-utilization of short-term debts and the under-utilization non-current assets provide corporate managers with useful policy directions.