Determinants of Cross-Company Differences in Capital Structures in Sri Lankan Hotel Industry: An Opinion Survey

Abstract

The capital structure is the composition of a company?s sources of funds, which is determined by the proportion of the debt-equity mix. Determination of capital structure of a firm is very important because it affects cost of capital. Firm?s capital structure is one of the most widely researched topics in corporate finance world. However, in the Sri Lankan context, only a few researches have been carried out on capital structure in service industry and hardly any in the hotel industry. Therefore, a need has been identified to find out the factors that determine capital structure of hotel industry. Hence, this research examines the effect of different company specific variables including liquidity, information asymmetry, agency cost, dividends, profitability, business risk, growth rate and bankruptcy costs on the capital structure of the Sri Lankan hotels. In achieving the aim of this research, an empirical investigation was conducted using survey questionnaires. In order to identify the overall explanatory power of variables, a multiple regression analysis was carried out and a simple linear regression was conducted to ascertain individual contributions of the determinants in explaining cross firm capital structure differences. The results revealed that the business risk variable is the only determinant that has a significant influence on proportion of debt in the capital structure.