Abstract:
This study examines the applicability of pecking order and static trade-off models of capital
structure to Sri Lankan listed companies. Using data for 103 non-financial companies from
2007/08 to 2016/17, we test the two models employing the Generalized Method of Moment
method. We find that the magnitude of the relation between the financing deficit and change in
debt is very low, and firms finance only a small portion of their financing requirement through
debt, providing weak support to the pecking order model. Although more profitable as well as
larger firms prefer less debt inconsistent with the trade-off model, high-growth firms seem to use
less debt consistent with the trade-off model, giving weak evidence to support the trade-off
model as well. The pecking order model seems more applicable because listed companies
consider external debt finance when meeting the financing deficit.
