While, other external factors, such as rate of inflation, GDP growth and size of capital market are not directly influencing capital structure decision of firms. However, external determinants of capital structure play a great role in financial decision-making process. The knowledge of the power and direction of such influence supports managers to make effective and accurate financing choice for a stable and successful development.
According to the study, this may be due to the fact that banks play a major role in the Sri Lankan economy to transfer funds from saving units to deficit units. As such banks are able to economize on the cost of borrowing and motives firms to access cheaper funds.
Capital structure decision is crucial to the financial well-being of any company. Managers make their financial decisions according to the source of financing based on the economic conditions and the countries' specifics. The study examined the effect of external factors on capital structure decision of Sri Lankan listed companies.
A total of 50 companies listed in Colombo Stock Exchange (CSE), are analyzed during the period from 2007 to 2011, using panel data.
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