Debt Capital and Financial Performance: A Comparative Analysis of South African and Sri Lankan Listed Companies

Abeywardhana, Dilriukshi Yapa; Magoro, Katlego

doi:10.5296/ajfa.v9i2.11761

Cited by 8 publications

(15 citation statements)

References 24 publications

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“…Further, H3 was also not supported with the results of the study that there was no significant relationship between short term debt to total assets ratio and ROE. Findings of the study were consistent with the studies of Velnampy and Niresh (2012); Ramadan and Ramadan (2015); Siddik et al (2017) and Abewardhana and Magoro (2017).…”

Section: Relationship Between Capital Structure and Roesupporting

confidence: 82%

“…Lingesiya and Premkanth (2012) Recently, Abewardhana and Magoro (2017) completed a study on debt capital and financial performance which was a comparative analysis of South African and Sri Lankan listed companies. Their findings of the study were, in case of Sri Lanka, debt financing in terms of short term debt had a negative impact on firm performance while long term debt had a positive impact.…”

Section: The Relationship Between Capital Structure and Financial Permentioning

confidence: 99%

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Capital Structure and Financial Performance: A Study on Commercial Banks in Sri Lanka

Sivalingam

Kengatharan

2018

Asian Economic and Financial Review

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Article History KeywordsTotal debt to total assets Long term debt to total assets Short term debt to total assets Growth in banks deposit Bank size Return on assets Return on equity. JEL Classification:G32.Purpose of this study was to examine the relationship between capital structure and financial performance of listed licensed commercial banks in Sri Lanka. Panel data were used to conduct the empirical study which were extracted from the annual reports of 10 selected banks for the period from 2007 to 2016. Total debt to total assets ratio, long term debt to total assets ratio, and short term debt to total assets ratio were used to measure the capital structure. Return on assets (ROA), return on equity (ROE) were used as financial performance measures. Size of the banks and growth in banks deposit were considered as control variables. Descriptive statistics, correlations, fixed effect and random effect models were used for the data analysis and then with the results of Hausman Specification Test, fixed effect model was considered as the most suitable model to examine the relationship between capital structure and ROA. According to the model, total debt to total assets ratio was significantly negatively related to ROA, however growth in banks deposit was significantly and positively related to ROA. Size, short term debt to total assets ratio and long term debt to total assets ratio did not show any relationship with ROA. Random effect model was considered as the most suitable model to examine the relationship between capital structure and ROE. As per the model, total debt to total assets ratio was significantly negatively related to ROE, while growth in bank deposit was significantly and positively related to ROE. Short term debt to total assets ratio, long term debt to total assets ratio and size were not significantly related to ROE. Results of the study suggest that financial managers should try to finance from internal sources rather than relying heavily on debt capital in their capital structure. Outcome of the study may useful to the practitioners, investors and decision makers in order to maximize their return from their investments. Contribution/ Originality:This study is one of very few studies which have investigated the relationship between capital structure and financial performance of listed licensed commercial banks in Sri Lanka which give the geographical contribution to the existing finance literature.

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Section: Relationship Between Capital Structure and Roesupporting

confidence: 82%

Section: The Relationship Between Capital Structure and Financial Permentioning

confidence: 99%

Capital Structure and Financial Performance: A Study on Commercial Banks in Sri Lanka

Sivalingam

Kengatharan

2018

Asian Economic and Financial Review

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“…The Modigliani and Miller (1958) theory predicted that under conditions of free markets, investor's uniform access to market information and absence of taxes as well as transaction charges, the capital structure remains immaterial in determining the worth of the firm. This theory was more based on assumptions that there were no bankruptcy costs, no information asymmetry among all the firm stakeholders (Abeywardhana, 2017). The same author argues that individual investors can equally access financial markets, as the firm can enable individual investors to create any leverage that was wanted but not offered or get rid of any leverage that the firm took on but was not wanted.…”

Section: Literature Review Theoretical Reviewmentioning

confidence: 99%

“…Accordingly, a raise in the amount of debt leads to a fall in the weighted average cost of capital of a firm until the firm obtains the debt-equity ratio that maximizes its value. Abeywardhana (2017) posits that the problems of financial distress increase proportionately with the amount of debt, resulting into an optimal capital structure that shows the highest possible tax shield the firm can achieve.…”

Section: Literature Review Theoretical Reviewmentioning

confidence: 99%

Short-Term Debt and Financial Performance of Small and Medium Scale Enterprises in Buganda Region, Uganda

Mugisha¹,

Omagwa²,

Kilika³

2020

IJFBS

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Short-term debt is regarded as an important source of financing for Small and Medium-sized enterprises (SMEs). This is because it can be easily accessed and useful during times of emergent working capital shortage. However, short-term debt is the least researched among the components of capital structure, which explains why its contribution to the financial performance of small and medium-sized businesses still lacks empirical validation especially in the Ugandan context. This paper sought to determine the effect of short-term debt on financial performance of Small and Medium Enterprises in Uganda. The study adopted a descriptive cross-sectional research design to collect and analyse the data. Stratified random sampling technique was used to select SMEs while purposive sampling technique was used to select one key respondent from each of the sampled 453 SMEs in Uganda. Primary data was collected using survey questionnaire. Data was analysed using descriptive statistics and simple linear regression analysis. The findings indicted that short-term debt had a negative and significant effect on financial performance of SMEs as measured by return on assets. The study provides empirical evidence to support the propositions in the extant literature that short-term debt significantly hampers financial performance of SMEs. The study recommends that SMEs should adopt low cost operation procedures to improve profitability. This would lead to accumulated profits that can be used for investment purposes as a means of driving growth among the SMEs without resorting to borrowing. This paper suggests that further research should be conducted to establish the justification for the negative and significant effect of short-term debt on financial performance using qualitative approaches.

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“…They have found that there was a positive relationship between debt to total assets and return on capital employed. Recently, Abewardhana and Magoro (2017) completed a study on debt capital and financial performance which was a comparative analysis of South African and Sri Lankan listed companies. Their findings of the study were, in case of Sri Lanka, debt financing in terms of short term debt had a negative impact on firm performance while long term debt had a positive impact.…”

Section: Empirical Studies On the Relationship Between Capital Structmentioning

confidence: 99%

Is Net Interest Margin influenced by Firm's Capital Structure Pattern: A Study on Commercial Banks in Sri Lanka

Kengatharan

Sivalingam²

2018

AJFA

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Objectives of this study were to examine the capital structure pattern of Sri Lankan commercial banks and to investigate the influence of capital structure pattern on net interest margin of commercial banks in Sri Lanka. This study was conducted with 10 licensed commercial banks which were listed in Colombo Stock Exchange (CSE), Sri Lanka. Panel data analysis was used to carry out the empirical study and data were extracted from the annual reports of selected companies for the ten years period from 2007 to 2016. Capital structure patterns of licensed commercial banks were measured by total debt to total assets ratio, long term debt to total assets ratio, and short term debt to total assets ratio. Net Interest Margin (NIM) was measured by net interest income to average earnings assets ratio. NIM specifies the cost and efficiency of financial intermediation by banks. Size of the banks and growth in banks deposit were considered as control variables. Descriptive statistics, correlation, pooled, fixed effect and random effect models were used for the data analysis. According to the descriptive statistics, present study found that commercial banks had lower leveraged capital structure pattern in Sri Lanka. F test was performed to diagnose the time fixed effect in the fixed effect model and outcome of the test revealed that p value was less than 0.05. Therefore, null hypothesis was rejected and fixed effect model was most appropriate than pooled OLS. Further, Lagrange Multiplier test for random effect was performed. The result indicated that the p value was 0.000 and rejected the null hypothesis in favor of the alternative which implied that random effect model was more appropriate than pooled OLS. Therefore, Hausman Specification test was performed to find out whether fixed or random effect model is suitable to examine the relationship between capital structure and NIM. Fixed effect model was considered as the most suitable model to examine the relationship between capital structure and NIM in this study. As per the result of fixed effect model, total debt to total assets ratio and long term debt to total asset ratio were significantly negatively related to NIM. Short term debt to total assets ratio, and size were not significantly related NIM. Results of the study suggest that financial managers should try to finance from retained earnings rather than relying heavily on debt capital in their capital structure. Outcome of the study may useful to the practitioners, investors and decision makers in order to maximize their return from their investments.

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Debt Capital and Financial Performance: A Comparative Analysis of South African and Sri Lankan Listed Companies

Cited by 8 publications

References 24 publications

Capital Structure and Financial Performance: A Study on Commercial Banks in Sri Lanka

Capital Structure and Financial Performance: A Study on Commercial Banks in Sri Lanka

Short-Term Debt and Financial Performance of Small and Medium Scale Enterprises in Buganda Region, Uganda

Is Net Interest Margin influenced by Firm's Capital Structure Pattern: A Study on Commercial Banks in Sri Lanka

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