Determinants effecting companies’ leverage: A study of panel data in Sri Lanka.

The purpose of the study was to carry out empirical testing, to find the factors that influence financial leverage of Sri Lankan companies. The sample covered 72 companies listed on Colombo Stock Exchange (CSE) and the analysis was based on the year end observations of five consecutive years running from 2006–2010. In this study, panel data methodology was used and six variables profitability, tangibility, risk, non-debt tax shield, size and age of companies were analyzed as the firm specific determinants of the companies-financial leverage. This paper was studied determinants of total debt ratio (leverage) as well as determinants of short term and long term debt ratio. Fixed effect regression analysis was applied for explanatory variables to measure their effect on leverage ratio. Three of variables were significantly related to leverage ratio whereas the remaining three variables were not statistically significant in having relationship with the leverage ratio. Analysis illustrated that variables of non-debt tax shield revealed a positive association with the leverage ratio, however, profitability, and tangibility revealed inverse relation with debt level. Risk, size and age of companies were not statistically significant to determine the leverage of companies. There was significant differences in the determinants of long and short term form of debts.