Determinants of Capital Structure : Evidence from the Hotel Sector in Sri Lanka

The purpose of this paper is to investigate the factors affecting capital structure decisions of listed hotel companies in Colombo Stock Exchange (CSE). Different classical capital structure theories are reviewed such as Modigliani and Miller Model (M & M Theory), trade-off theory (TOT) and pecking order theory (POT) to formulate testable propositions concerning the determinants of debt levels of the companies. The model is estimated using a panel data approach for twenty five CSE companies for the period of 2009-2015. Regression models were used to test variables representing growth opportunities, firm size, profitability, effective tax rate, operational risk, tangibility and net commercial credit position. The findings suggest that profitability, growth opportunities, and net commercial credit position are related negatively to the debt ratio, while firm size, tangibility, operational risk and effective tax rate do not appear to be related to the debt ratio. Although the findings partially support both the pecking order theory (POT) and trade-off theory (TOT), neither the trade-off nor the pecking order theory exactly seem to explain the capital structure of Sri Lankan hotel companies