IJSRP, Volume 3, Issue 6, June 2013 Edition [ISSN 2250-3153]
Purpose – The aim of this study is to find out the factors that affect the capital structure of hotels and restaurant companies and to investigate whether the capital structure models derived from Western settings provide convincing explanations for capital structure decisions of the Sri Lankan companies.
Methodology – Different conditional theories of capital structure are reviewed (the trade-off theory, pecking order theory and agency theory) in order to formulate working hypotheses concerning the determinants of capital structure of the hotels and restaurant companies. The investigation is performed for a sample of 15 companies listed on the Colombo Stock Exchange during 2008-2012.
Findings – The results suggest that only profitability is negatively related to the debt ratios (long term; short term and total debt) whereas tangibility (asset structure), size and growth do not appear to be significantly related to the debt ratios. Through the findings we can come to conclusion that Pecking order theory is more relevant to Sri Lankan context.
Practical implications – This study has laid some groundwork to investigate the determinants of capital structure of Sri Lankan companies upon which a more detailed evaluation could be based. Furthermore, findings should help corporate managers and decision makers to make optimal capital structure decisions.