Abstract:
The study examines the interaction of capital structure and
ownership structure using a sample of sixty five (65) firms listed in the
Colombo Stock Exchange. Equity block holders are identified and grouped
as ‘Parent company’, ‘other Institutional shareholders’ and ‘Managers’.
Generalized Method of Moments (GMM) estimator is employed for an
unbalanced panel data for years, from 2006 to 2010. The dynamic tests reveal
that there is a significant negative influence of profitability, asset structure,
and operating risk on the debt ratio of firms. Growth is insignificant and
affects negatively to leverage. The size has a significant positive impact on
financial leverage. The institutional ownership and managerial ownership is
negatively related to the leverage while ownership concentration with a
parent company positively affects the leverage. This suggests that
concentrated ownership and high debt level together causes high risk for
firms. Hence, the firms would prefer a lower debt ratio as means of risk
reduction. In contrast, the parent company ownership does not raise risk and
therefore firms prefer higher debt level. Further the institutional investors
seek low geared firms in reducing the risk of investment. The findings also
indicate that the large firms have easy access to the credit market and
become more levered. The firms use retained earnings largely, hence the
increased revenue results in low debt ratio. The results also indicate an
application of pecking order theory for finance and that the institutional
investors are seeking for low geared firms. Hence the firms are subject to the
control by market forces.
