Firm Specific Factors of Corporate Debt Decisions in a Frontier Market

Abstract

This study investigates firm specific determinants of debt financing among Sri Lanka’s listed capital goods companies, a capital-intensive sector within a frontier setting. Grounded in trade off and pecking order theories, the analysis evaluates the influence of profitability, liquidity, asset tangibility, non-debt tax shields, operating and investment cashflows, interest costs and firm size on debt decisions. Using panel data from 25 firms over ten years (2015-2024), the analysis applies pooled OLS, fixed effects and random effects. The results show that profitability, liquidity and operating cash flow are negatively associated with debt decision, while asset tangibility and firm size positively affect the debt decision, consistent with collateral-based borrowing and trade off considerations. Non debt tax shields and investment cash flows exhibit limited effects, and higher interest costs are linked to lower debt usage. The study contributes by focusing on a frontier market during and after the 2022 crisis, modeling two leverage ratios alongside cash flow decompositions and clarifying when classical theories prevail in constrained institutional contexts. The findings offer practical implications for managers in structuring financing decisions and provide policymakers and investors with insights into debt behaviour in under researched frontier economies.