The Determinants of Leverage of the Listed Companies in Sri Lanka : An Empirical Study

The role of financial leverage in magnifying the return of the shareholder is based on the assumptions that the fixed charges fund. A company increases its leverage because it can invest in business operations without increasing its equity. Leverage is not always bad, however it can increase the shareholder's return on their investment and often there are tax advantages associated with borrowing. The purpose of present study is to investigate the determinants of leverage (or capital structure) decision of Sri Lankan firms based on a panel data set over a period of five years from 2007-2011 comprising of 60 companies. This study examines the impact of five firm specific factors – firm size, firm growth rate, profitability, and asset tangibility, on the leverage decision of listed companies in Sri Lanka. The results show that financial leverage of Sri Lankan firms is influenced by firm size, firm growth rate and profitability. This study contributes to the literature on the factors that influence financial leverage of the firm