Study of Business Companies in Colombo Stock Exchange

Study of line Companies in Colombo Stock Exchange chapiter grammatical construction is most significant discipline of participations operations. The Study attempts to identify the impact of Capital Structure on Companies deed. The analyze has been made Financial twelvemonth from 2005 to 2009 (05 years) financial year of Business companies in Sri Lanka. The results shown the descent amid the working bang-up mental synthesis and financial movement is controvert association at -0.114.. F and t values argon 0.366, -0.605 respectively. It is reflect the unimportant level of the Business Companies in Sri Lanka. Hence Business companies mostly depend on the debt crown. So that, they have to pay interest expenses much.1. cosmosTo understand how companies finance their operations, it is necessary to examine the determinants of their financing or nifty coordinate decisions. Company financing decisions involve a wide range of insurance policy issues. At the private, they have i mplications for capital market development, interest govern and security price goal, and regulation. At the private, such decisions affect capital coordinate, collective system and company development (Green, Murinde Suppakitjarak, 2002). Knowledge about capital structures has mostly been derived from data from developed economies that have many institutional similarities (Booth 2001). It is important to note that miscellaneous countries have different institutional arrangements, mainly with respect to their tax and bankruptcy codes, the live oning market for incorporate control, and the roles banks and securities markets play.Capital structure refers to a mixture of a variety of presbyopic term sources of funds and equity shares including re looks and surpluses of an enterprise. The historical attempt to building theory of capital structure began with the presentation by Modigliani miller (MM)(1958). They revealed the situations under what conditions that the Capital st ructure (CS) is relevant or irrelevant to the financial action of the listed companies. most of the decision making process related to the CS are deciding factors when form the CS, a number of issues e.g. cost, various taxes and rate, interest rate have been proposed to explain the variation in Financial Leverage across firms (Van Horne,1993 Hampton,1998 Titman Wessels,1998).these issues suggested that the depending on attributes that caused the cost of various sources of capital the firms select CS and benefits related to debt and equity financingThe family among capital structure and financial execution of instrument is one that received large attention in the finance literature. How important is the concentration of control for the company deed or the type of investors exerting that control are questions that authors have tried to dress for long time prior studies show that capital structure has relating with corporate governance, which is the key issues of state owned en terprise. To study the effects of capital structure or financial performance, will help us to know the potential problems in performance and capital structure.2. Literature ReviewModigliani and Miller(M M)(1958) wrote a paper on the irrelevancy of capital structure that inspired researchers to debate on this subject. This debate is still continuing. However, with the passage of time, novel dimensions have been added to the question of relevance or irrelevance of capital structure. MM declared that in a world of frictionless capital markets, there would be no optimal financial structure (Schwartz Aronson, 1979). This theory afterward became known as the Theory of Irrelevance. In M Ms over-simplified world, no capital structure mix is better than another. M Ms Proposition-II attempted to practice the question of why there was an increased rate of return when the debt ratio was increased. It stated that the increased expected rate of return generated by debt financing is hardl y offset by the risk incurred, regardless of the financing mix chosen.Brander and Lewis (1986) and Maksimovic (1988) provide the theoretical framework that links capital structure and market structure. Contrary to the simoleons maximization objective postulated in industrial organization literature, these theories are similar to the corporate finance theory in that they assume that the firms objective is to maximize the riches of shareholders. Furthermore, market structure is shown to affect capital structure by influencing the competitive behavior and strategies of firms.Firms in an oligopolistic market will follow the strategy of maximizing their proceeds in favorable economic conditions to optimize serviceability (Brander Lewis 1986). The theory also holds in unfavorable economic conditions firms would take a cut in ware and reduce their returnability. Shareholders, though, while enjoying increased riches in good periods, tend to ignore a decline in advantageability in b ad times. This is overdue to the fact that unfavorable consequences are passed in to lenders because of shareholders limited liability status. Therefore, the oligopolistic firms, in contrast to firms in competitive markets, would employ higher(prenominal)er levels of debt to produce more when opportunities to ready higher profits arise. The implied prediction of the output maximization hypothesis is that capital structure and market structure have a imperious birth. In corporate finance, the agency costs theory supports the use of high debt, and it is consistent with the prediction of the output maximization hypothesis.Jensen and Meckling (1976) argue that the shareholders-lenders conflict has the effect of shifting risk from shareholders and of appropriating wealth in their favor as they take on forged investment projects (asset substitution). Hence, shareholders, and managers as their agents, are prompted to take on more borrowing to finance risky projects. Lenders receive i nterest and principal if projects succeed, and shareholders appropriate the residual income however, it is the lender who incurs the loss if the project fails. It is difficult and costly for debt holders to be able to assess and monitorHuson, and Nazrul Hisyam. (2008) examined that the relationship among ownership structure and company performance has been issue of interest among academics, investors and policy makers because of key issue in understanding the effectiveness of alternative governance system in which government ownership serve as a control mechanism. Therefore, this study examines the impact of alternative ownership/control structure of corporate governance on firm performance among government linked companied (GLCs) and Non-GLC in Malaysia. It is believed that government ownership serve as a monitoring device that play to better company performance after controlling company specific characteristics. We used Tobins Q as market performance measure while ROA is to dete rmine method of accounting performance measure. This study is based on a sample of 210 firms over a period from 1995 to 2005. We use panel based regression approach to determine the impact of ownership mechanism on firms performance. Findings appear to suggest that there is a significant impact of government ownership on company performance after controlling for company specific characteristics such as company size, non-duality, leverage and growth. The finding is off significant for investors and policy marker which will serve as a guiding for better investment decision.Mohammed Omran (2001) evaluates the financial and operating performance of rawly privatized Egyptian state-owned enterprises and determines whether such performance differs across firms according to their new ownership structure. The Egyptian privatization program provides unique post-privatization data on different ownership structures. Since most studies do not distinguish between the types of ownership, this pa per provides new insight into the impact that post-privatization ownership structure has on firm performance. The study covers 69 firms, which were privatized between 1994 and 1998. For these newly privatized firms, these study documents significant increases in profitability, operating efficiency, capital expenditures, and dividends. Conversely, significant decreases in employment, leverage, and risk are found, although output shows an insignificant decrease following privatization. The results also show that Egyptian state-owned enterprises, which were sold to anchor-investors and employee shareholder associations, seem to surpass other types of privatization, such as minority and majority initial public offerings.B.Nimalathasan and Brabete (2010) pointed out that Dept equity ratio is positively and strongly associated to all profitability ratios in Listed Manufacturing Companies.3. Conceptual Frame WorkBased on the Litteratures, the following conceptual model is constructed. It shows that hypotgesized the relationship between capital structure and Performance of listed Business companies in Sri LankaDebt EquityCSGP NPFPROEROI4. ObjectivesThe main objective is to find out the impact of Capital Structure on Financial Performance of the Business companies in Srilanka.To achieve the above objective the following sub objective are consideredTo identify the relationship between capital structure and performanceTo determinants of a capital structure5.0 HypothesesThe following hypothesis is formulated for the studyH1- The capital structure has significant impact on financial performance.H2-Capital structure is importantly correlated with financial performance6.0 MethodologyTo produce the above mentioned research objective, the data for this study was gathered from the financial statements as published by Business Companies. In addition, another source of data was through reference to the review of different articles, papers, and relevant previous studies. For this purpose, collecting data of Business firms is used which are listed on Colombo Stock Exchange.. All firms are taken for the study representing the period of 2005-2009, and the average values of each item was considered for the purpose of ratio reckoning and analysis.6.1 Mode of Analysis1.Capital structureRole of debt and equityDebt 100equityDebt 100 chalk up fundsTotal funds2.Financial PerformanceGross profitGross profit 100 dismiss thoroughgoing(a) revenueNet SalesNet profit Net profitNet profit 100SalesROAPAIT 100AssetsROI/ROCEInvestmentPBIT 100Equity7. Results and Discussions7.1 Correlation AnalysisCorrelation is concern describing the strength of relationship between both variables. In this study the correlation co- in force(p) analysis is under taken to find out the relationship between capital structure and financial performance. It can be said that the what relationship exist among variablesCapital structure correlated withR value R2 valueGross profit 0.360 0.1296Net pro fit 0.110 0.0121ROI -0.104 0.0108ROA -0.196 0.0384Performance -0.114 0.01297.1.1 Capital structure and Gross profit control board IVariablesCapital structureGross profitCapital structure10.360Gross profit0.3601It shows the relationship between earthy profit and capital structure variables. There is a weak positive relationship between two variables. The correlation is 0.360. significant level is 0.01. the co-efficient of determination is 0.1296. that is altogether 12.96% of version in the capital structure is accounted by the gross profit.So, There is a weak positive relationship between capital structure and gross profit7.1.2 Capital structure and Net profitTable IIVariablesCapital structureNet profitCapital structure1-0.110Net profit-0.1101It illustrates the relationship between net profit and capital structure variables. There is a weak proscribe relationship between two variables. The correlation is -0.110. Significant level is 0.01. The co-efficient of determination is 0.0 121. That is only 1.21% of variance in the capital structure is accounted by the net profit.7.1.3 Capital structure and ROITable tripletVariablesCapital structureROICapital structure1-0.104ROI-0.1041It indicates the relationship between ROI and capital structure variables. There is a weak negative relationship between two variables. The correlation is -0.104. Significant level is 0.01. The co-efficient of determination is0.0108. that is only 1.08% of variance in the capital structure is accounted by the ROI.7.1.4 Capital structure and ROATable IVVariablesCapital structureROACapital structure1-0.196ROA-0.1961It shows the relationship between ROA and capital structure variables. There is a weak negative relationship between two variables. The correlation is -0.196 significant level is 0.01. the co-efficient of determination is 0.0384. that is only 3.84% of variance in the capital structure is accounted by the ROA.7.1.5 Capital structure and Financial performanceTable VVariablesCapita l structureFinancial performanceCapital structure1-0.114Financial performance-0.1141It illustrates the relationship between performance and capital structure variables. There is a weak negative relationship between two variables. The correlation is -0.114. Significant level is 0.01. The co-efficient of determination is 0.0129. that is only 1.29% of variance in the capital structure is accounted by the performance.7.2 Regression AnalysisRegression analysis is used to test the impact of financial performance on capital structure of the listed companies traded in Colombo stock exchange7.2.1 Capital structure and Gross profitTable VI formRR SquareAdjustedR SquareStd.Error of the melodic theme10.360a0.1290.0980.32306The above table shows the weak positive correlation between the capital structure and gross profit.Table VIIModelUn standardizedCoefficients regularizeCoefficientstsigBStd.ErrorBeta1(constant)Capital structure0.1870.0470.0730.0230.3602.5562.0390.0160.051The above table indic ates the coefficient of correlation between the capital structure and gross profit. multiple r2 is 0.1296. only 1.29% of variance of gross profit is ideal by the capital structure. But, remaining 98.21% of variance with gross profit is attributed to other factors.7.2.2 Capital structure and Net profitTable VIIIModelRR SquareAdjustedR SquareStd.Error of the Estimate10.110a0.012-0.0230.36514The above table shows the weak negative correlation between the capital structure and net profit.Table IXModelUn standardizedCoefficientsStandardizedCoefficientstsigBStd.ErrorBeta1(constant)Capital structure0.124-0.0150.0830.026-0.1101.498-0.5840.1450.564The above table indicates the coefficient of correlation between the capital structure and net profit. Multiple r2 is 0.012. Only 1.2% of variance of net profit is accurate by the capital structure. But, remaining 98.8 % of variance with net profit is attributed to other factors7.2.3Capital structure and ROITable XModelRR SquareAdjustedR SquareStd .Error of the Estimate10.104a0.011-0.025115.19484The above table shows the weak positive correlation between the capital structure and ROI.Table XIModelUn standardizedCoefficientsStandardizedCoefficientstsigBStd.ErrorBeta1(constant)Capital structure31.283-4.56326.0508.250-0.1041.201-0.5530.2400.585The above table indicates the coefficient of correlation between the capital structure and ROI. Multiple r2 is 0.011. Only 1.1% of variance of ROI is accurate by the capital structure. But, remaining 98.9% of variance with ROI is attributed to other factors7.2.4 Capital structure and ROATable XIIModelRR SquareAdjustedR SquareStd.Error of the Estimate10.196a0.0390.0040.10866The above table shows the weak positive correlation between the capital structure and ROA.Table XIIIModelUn standardizedCoefficientsStandardizedCoefficientstsigBStd.ErrorBeta1(constant)Capital structure0.099-0.0080.0250.008-0.1964.020-1.0600.0000.298The above table indicates the coefficient of correlation between the cap ital structure and ROA. multiple r2 is 0.039. only 3.9% of variance of ROA is accurate by the capital structure. But, remaining 96.1% of variance with ROA is attributed to other factors7.2.5 Capital structure and Financial performanceTable XIVModelRR SquareAdjustedR SquareStd.Error of the Estimate10.114a0.013-0.0220.98395The above table shows the weak positive correlation between the capital structure and performance.Table XVANOVAb.3541.354.366.550a27.10928.96827.46329RegressionResidualTotalModel1Sum ofSquaresdfMean SquareFSig.Predictors (Constant), Capital_structurea.Dependent Variable Performanceb.Table XVIModelUn standardizedCoefficientsStandardizedCoefficientstsigBStd.ErrorBeta1(constant)Capital structure0.704-0.0430.2230.070-0.1143.162-0.6050.0040.550The above table indicates the coefficient of correlation between the capital structure and performance. multiple r2 is 0.013. only 1.3% of variance of performance is accurate by the capital structure. But, remaining 98.7% of varian ce with performance is attributed to other factors.8. Concluding RemarksCorrelation analysis explains, there is a weak positive relationship between gross profit and capital structure (0.360).at the same time, there is a negative relationship between net profit and capital structure (-0.110).it reflects the high financial cost among the firms. ROI and ROA also has negative relationship with capital structure at -0.104, -0.196 respectively.It is focused on the overall point of view of the relationship between the capital structure and financial performance. There is a negative association at -0.114. Co-efficient of determination is 0.013. F and t values are 0.366, -0.605 respectively. It is reflect the insignificant level of the Business Companies in Sri Lanka.Business companies mostly depend on the debt capital. Therefore, they have to pay interest expenses much.8.1 Testing of HypothesesStatistical Techniques ResultsCorrelation -0.114Co efficient of determination -0.0129Based on the empirical results of this study, H1this hypothesis come false .Because in this study the empirical results shows that there is a insignificant negative relationshipH2 There is a positive relationship between the capital structure and firms financial performance?.At the first step of testing the hypothesis(H1), hypothesis (H1) was considered and tested for its validity. It has the following result between the capital structure and firms financial performance measured by performance measures such as ROA , ROI ,Net profit margin and etcetera Based on the above cause gathered, the H2 was rejected. Because research result is negative relationship between the capital structure and firms financial performance.H0 there is a negative relationship between the capital structure and firms financial performance?.After the rejection of H1, the Null hypothesis (H0) was tested for its validity. H0 was accepted based on the above evidence gathered. it has been provided that there is a negative re lationship between the capital structure and firms financial performance(-0.114).9.0 Suggestions and RecommendationsThe following suggestions are recommended to increase the Companys financial performance based on capital structure.Performance standards should be established and communicated to the investors. This will help investors to achieve the standard and take better investment decisions.Identifying weaknesses of investment may be beat out one to improve the firms financial performance, because it indicates the area which decision should be taken.Motivating the investors to help to achieve the high level of firms financial performance..Political changes are truly important factor in the share market. It is also determine the firm performance. Therefore, political should possible to increase the financial performance of the listed companies.Inflation and exchange rate also affect the listed companys performance. So, government should consider the economic growth to control th e inflation.