Determinants of Capital Structure; A Study of Listed Banks in Colombo Stock Exchange in Sri Lanka

This study examines the determinants of capital structure of listed banks in the Colombo Stock Exchange in Sri Lanka. Nine listed banks were taken as samples from the Colombo Stock Exchange for the period of 2007 to 2019. The leverage as dependent variable and GDP growth rate, inflation, size of the banks, Return on Assets, tax, profitability and total debt to equity ratio as independent variables are used to find the relationship between dependent and independent variables. In order to investigate these relationships, panel data least square method was adapted with random effect mode. The findings show that debt to equity ratio tax paid of the listed banks is important as determinants of capital structure of banks in Sri Lanka. However, GDP growth, inflation, size of the banks, Return on Assets, and profitability are found to have no statistically significant impact on the capital structure of the listed banks in Sri Lanka. In addition, the results of the analysis indicate that Pecking Order Theory is pertinent theory in the Sri Lankan banking industry, whereas there is little evidence to support Static Trade-off Theory and the Agency Cost Theory. Therefore, the banks should consider factors appropriately to determine their optimum capital structure in a prudent manner against potential shocks in terms of the regulation stipulated by regulator.