Research Proposal: Capital Structure of CSE Listed Manufacturing Firms

This research proposal examines the determinants of capital structure, focusing on listed manufacturing companies on the Colombo Stock Exchange (CSE) in Sri Lanka. The study investigates the relationship between capital structure and various determinants, including net profit margin, operating profit margin, return on assets, return on equity, and firm size. The research aims to identify these determinants and analyze their impact on debt-to-equity, long-term leverage, and total leverage ratios. The methodology involves analyzing secondary data from annual reports of 20 randomly selected manufacturing companies from 2014 to 2018 using statistical techniques such as descriptive and inferential methods (correlation and regression analysis). The study addresses a research gap by examining capital structure as a dependent variable and contributes to understanding how companies finance their operations. The proposal includes a literature review, research questions, objectives, hypotheses, and a detailed research methodology with limitations and a research timetable. The findings of this research are expected to provide insights into financial decision-making and capital market development within the Sri Lankan context.

RESEARCH PROPOSAL
“DETERMINANTS OF CAPITAL STRUCTURE: SPECIAL
REFERENCE TO LISTED MANUFACTURING
COMPANIES OF COLOMBO STOCK
EXCHANGE(CSE),SRI LANKA”
S.MADHUSHIKA SENEVIRATHNE
2015/BAD/202
DEPATEMENT OF FINACIAL MANAGEMENT
FACULTY OF MANAGEMENT STUDIES AND COMMERCE
UNIVERSITY OF JAFFNA
SRI LANKA.

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CONTENTS
1. Background of the study ....................................................................3
2. Statement of the problem ...................................................................4
3. Research questions .............................................................................4
4. Research objectives ...........................................................................5
5. Significances of the study .................................................................5
6. Literature Review ..............................................................................6-7
7. Hypothesis .........................................................................................7
8. Research methodology ....................................................................... 8-9
9.1 Population and sample
9.2 Data collection
9.3 Data analysis
9.4 Operationalization of variable
9. Limitation ..........................................................................................9
10. Research timetable ............................................................................10
11. Summary ............................................................................................ 10
12. References

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1) BACKGROUND OF THE STUDY
The capital structure in the financial term means the way of firm finance their assets through the
combination of equity , debt or hybrid securities .capital structure is referred to as the ratio of
different kinds of securities raised by a firm a long term finance the capital structure involves
two decisions.
 Type of securities to be issued is equity shares, performance shares and long term
borrowings.
 Relative ratio of securities can be determined by process of capital gearing.
There are several factors determining the capital structure. Therefore trading on equity, degree
of control, flexibility of financial of financial plan, choice of investors, capital market
conditions, period of financing, stability of sales and size of the company.
The above factors are included on financial performance.
The financial performance is the key element to determine the capital structure. The firms may
have their retained earnings to increase their capital structure. Capital structure is an important
topic in corporate finance for practitioners and academic researchers. A number of theories have
been proposed in the recent years to explain the variation in debt ratios across firms.
Capital structure theory suggests that firms determine what is often referred to, as a target debt
ratio. This is based on various trade-off between costs and benefits of debt versus equity.
The capital structure of the firms included the equity capital, debt capital, revenue reserves and
capital reserves. The revenue reserves include the retained earnings which contains the earnings
before interest and tax for the year. Most of the firms’ capital consists of the retained earnings
according to their investment opportunity.
The purpose of this study is to investigate the determinants of capital structure of listed
companies of Colombo stock exchange (CSE), Sri Lanka. Most theoretical and empirical studies
in capital structure have focused on large listed companies for both developed and developing
countries.

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2) STATEMENT OF THE PROBLEM
This study focuses on the determinants of capital srtucture in listed manufacturing companies in
Sri Lanka.
Mostly capital structure has been taken as an independent variable in previous researches .but it is
discussed here as a dependent variable on profit margin. This study tries to fill this research gap.
There are more previous studies related to the capital structure and firm value, firm performance
or profitability. The study carried Nimalathasan, Brabete (2010) relating to “capital structure and
its impact on profitability a study of listed manufacturing companies in Sri Lanka”, the
analysis shows that debt equity ratio positively and strongly associated to all profitability ratios.
Sangeetha and Sivathaasan (2013), acquire a significant strong and positive relationship between
profitability and debt-equity level. Frank and Goyal (2005) experienced a positive relationship
between profitability and debt-equity level in some models.
Moreover, various studies identified the determinants of profitability (Velnamby T. &
Nimalathasan B., 2008). Buvanendra (2013) on her study “capital structure determinants
evidence from the manufacturing and services sector companies in Sri Lanka” conclude that
manufacturing companies’ debt-equity decision is influenced only by the profitability variable.
There are various factors that determine the capital structure in the manufacturing firms. Many
authors (Gaud, et al. (2003), Masnoon & Anwar (2012), Rajan & Zingales (1995) in their research
studies have found out a negative relation between size of firm and its leverage. Profitability seems
to be strongly positive and significant association with the financial leverage of the firm because
of strong financial position. An increase in the corporate tax rate affects the debt-to-assets ratio
positively, and that this effect is stronger for firms with concentrated ownership.
This study will examines the determinants affect on capital structure of companies listed under
manufacturing sector on CSE. The reason for examining the manufacturing sector is that it is an
important sector to the economy of Sri Lanka.
So Researcher can formulate research problem, “To what extent the determinants of capital
structure impact on capital structure of companies listed under manufacturing sector on
CSE?”
3) RESEARCH QUESTIONS
1. What are the determinants of capital structure of the listed manufacturing companies in
Sri Lanka?
2. What is the relationship between determinants and capital structure of the listed
manufacturing companies in Sri Lanka?

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4) RESEARCH OBJECTIVES
This research study is aim to achieve the following objectives;
1. To identify the determinants of capital structure of the listed manufacturing companies
in Sri Lanka.
2. To examine the relationship between determinants and capital structure of the listed
manufacturing companies in Sri Lanka.
5) SIGNIFICANCE OF THE STUDY
This research examines the “Determinants of Capital Structure: A Study of listed manufacturing
companies of colombo stock exchange(cse),sri lanka, analysis at the overall level. The primary
objective of this study is to identify the relationship between capital structure and determinants of
listed manufacturing companies in CSE.
The secondary objective is to identify the factors that influence on capital structure of listed
manufacturing companies of colombo stock exchange(cse),sri lanka
To understand how companies finance their operations, it is necessary to examine the determinants
of their financing or capital structure decisions. Company financing decisions involve a wide range
of policy issues. At the private, they have implications for capital market development, interest
rate and security price determination and regulation.
A financial performance analysis may provide the following benefits:
 Identify financial strengths and weaknesses and evaluate financial performance in relation
to the industry performance as a whole, and acquire useful information concerning
competitors.
 Historical financial ratio analysis can be used as an effective preliminary step in preparing
a budget or in making a forecast.
 Evaluate past performance and set objectives for future performance. Also provides an
ongoing means to evaluate a company’s performance financially.
 Evaluate a proposed sale, merger or acquisition. Determine the financial strengths and
weaknesses of the company and ultimately the transaction.
 A greater awareness of financial statements and their interrelationship can lead to improved
profitability or cash flow.

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6) LITERATURE REVIEW
Capital structure is a mix of a company’s long term debt, specific short term debt, common equity
and preferred equity. The capital structure is how a firm finances its overall operations and growth
by using different sources of funds. Debt comes in the form of bond issues or long term notes
payable, while equity is classified as common stock, preferred stock or retained earnings. Short
term debt such as working capital requirements is also considered to be part of the capital structure.
A company’s proportion of short and long term debt is considered when analyzing capital
structure. When people refer to capital structure they are most likely referring to a firm’s debt to
equity ratio, which provides insight into how risky a company is. Usually a company more heavily
financed by debt poses greater risk, as this firm is relatively highly levered.
Capital Structure decisions can have important implications for the value of the firm and its cost
of capital. Poor capital structure decisions can lead to an increased cost of capital thereby lowering
the net present value (NPV) of many of the firm’s investment projects to the point of making many
investment projects unacceptable ( known as the under investment problem). Effective capital
structure decisions will lower the firms overall cost of capital and raise the NPV of investment
projects leading to more projects being acceptable to undertake and consequently increasing the
overall value of the firm (Gitman, 2003).
Features of Appropriate Capital Structure establish theCapital structure at that level of debt –
equity proportion where the market value per share is maximum and the cost of capital is
minimum. Appropriate capital structure should have the following features:
 Profitability / Return
 Solvency / Risk
 Flexibility
 Conservation / Capacity
 Control
Variable Identification
This research study uses value of the firm as the dependent variable and the financial leverage as
the independent variable.
Capital Structure (CS) Dependent Variable
Determinants Independent Variable

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Conceptual Framework
The following conceptual model is formulated to disclose the relationship between Determinants
and capital structure of the companies.
INDEPENDENT VARIABLE DEPENDENT VARIABLE
7) HYPOTHESIS
H1: Determinants of capital structure significantly impact on Firm’s debt equity
H2: Determinants of capital structure significantly impact on Firm’s Long-Term Leverage
H3: Determinants of capital structure significantly impact on Firm’s Total Leverage
Net Profit Margin
Operating Profit Margin
Return on Assets
Return on Equity
Firm Size
Debt to Equity
Long Term Leverage
Total Leverage

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8) RESEARCH METHODOLOGY
Population and Sample
There are 41 listed manufacturing companies on Colombo Stock Exchange (CSE). All of them
consider as the population for this study. Among them randomly selected 20 companies consider
as the sample.. The data representing the periods of 2014-2018 is taken into consideration for the
purpose of ratio computation and analysis. Then totally 100 observations considered in this study
for the analysis purpose.
Data collection
The source of secondary data will be adopted for the sampled data collection of this research study.
Necessary data will collect from selected 20 companies’ annual reports over 5 years (2014, 2015,
2016, 2017, & 2018) through the link available in the website of Colombo Stock Exchange. In
some cases, some data and information will collect from the website of the sampled firms, different
articles, papers, books, journals and company’s annual reports.
Data analysis
Those collected data will analyze by using SPSS (Statistical Package for the Social Sciences). And
also for the analysis will use both descriptive method (mean, mode & median) and inferential
method (correlation analysis & regression analysis).
To find out the impact of the independents variables such as Net Profit Margin,Operating
ProfitMargin, Return on Assets, Return on Equity, Firm Size on Debt to Equity, Long Term
Leverage, Total Leverage, the following models will be used.
Model – I
D/E Ri,t = β0+β1NPM i,t +β2 OPM i,t + β3 ROA i,t + β4 ROE i,t + β5 FSIZE i,t + ε
Model – II
LTDRi,t = β0+β1NPM i,t +β2 OPM i,t + β3 ROA i,t + β4 ROEi,t + β5 FSIZE i,t+ ε
Model – III
TDRi,t = β0+β1NPM i,t +β2 OPM i,t + β3 ROA i,t + β4 ROEi,t + β5 FSIZE i,t+ ε
Where,
β0 = constant variable
β1, β2, β3, β4, β5 = Model coefficients of variables
ε = Error term.
i,t = for firm i in period t

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Operationalisation of Variable
9) LIMITATIONS
There are 70 listed companies under different sectors in Colombo Stock Exchange. But in this
study it has been only selected 20 companies as the sample. So the result of this study will not
relevant to all listed companies in CSE. And 5 years period only take for the data collection. This
study will uses only annual reports to collect necessary data. But companies do not mention their
all information in their annual reports. Therefore it is hard to get all and 100% true information
from their annual reports.
Variables Indicator Measurement Level
Capital Structure Debt to equity Ratio Total debt /Total Equity
Long term debt ratio Long term Debt/ Total Assets
Total debt ratio Total Debt/ Total Assets
Determinants of
capital structure
Net Profit Margin Net profit before interest and tax / Revenue * 100
Operating Profit Margin Operating Profit / Revenue * 100
Return on Assets Profit before interest and tax / Total Assets * 100
Return on Equity Net Profit / Total Equity * 100
Firm Size Log of Sales value

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10) RESEARCH TIMETABLE
11) SUMMERY
This study one includes an overall introduction to the total research process with the purpose of
giving a significant understanding to the reader. This study presents the background of the study,
statement of the problem, research objectives, research questions, significance of the study,
literature review, hypothesis, research methodology, limitation and finally research timetable in
brief of the study. Population and sample, data collection, data analysis and operationalization of
variables are included in research methodology.
Time(week) Dec Jan Feb March April May June July
Activities 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Identify the
research
problem
Literature
review
Selecting
research title
Book collection
Prepare the
proposal
Data collection
Data entry
Data analysis
Getting
findings &
summarize
Writing of
results
Type setting
Binding
Submission of
dissertation

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oriented institutions. Journal of Financial and Quantitative Analysis,, Vol 43,issue
1,pp.59-92.
Barclay and smith, N. B. (2010 ). Capital Structure and Its Impact on Profitability. A Study of
Listed Manufacturing Companies in Sri Lanka 2010, Revista Tinerilor Economisti/The
Young Economists Journal 13,, 55-61.
Bhaduri, S. N. ((2002)). Determinants of capital structure choice: a study of the Indian corporate
sector,. In Applied Financial Economics, (pp. Vol 12, Issue 9, pp. 655-665).
Booth, L. A.-K. (2001). Capital Structure in Developing countries, The Journal of Finance,, Vol.
56, Issue 1, pp. 87-130.
http://www.cse.lk. (n.d.).
http://www.researchers world.com . (n.d.).
Miller, M. H. ( 1977,). “Debt and Taxes”. , Journal of Finance, , Vol.2, pp.261-275.
Modigliani F . and Miller M. H. (1958). “The Cost of Capital, Corporation Finance and The Theory
of Investment”. , American Economic Review,, Vol.XLVIII (3), pp.261-297.
Smarakoon, L. P. ( 1999). The capital structure of Sri Lankan companies. . Sri Lankan Journal of
Management,, 4(1&2).