Capital Structure Approaches and Firm Return: A Comparative Analysis of Banking and Insurance Companies Listed in the Colombo Stock Exchange in Sri Lanka

Abstract

inancing decisions are one of the most critical areas under the purview of financial managers. These decisions have direct impact on capital structure approaches and firm return. Capital structure decisions affect the firm's cost of capital, capital budgeting decisions and firm value. It has always been an area for researchers to understand the relationship between capital structure approaches and firm return. This paper investigates the impact of capital structure approaches on firm return based on data obtained from nineteen (19) listed banking and insurance companies in the Colombo Stock Exchange for the period spanning from year 2009 to 2017. The study measures the firm return in terms of return on assets and return on equity whereas capital structure approaches are measured in terms of Aggressive Capital Structure Investment Policy and Aggressive Capital Structure Financing Policy. The result indicates that most of listed banking firms and insurance firms adopt aggressive capital structure financing policy in their capital structure decisions. It is important to note that Sri Lankan listed banking and insurance companies prefer to use high volume of liquid assets to control the corporate finance in order to maximize the firm return. The result further reveals that Aggressive Capital Structure Investment Policy affects positively to the return on assets and Aggressive Capital Structure Financing Policy affects negatively to the return on equity of both banking and insurance companies in Sri Lanka. Finally, this research confirmed the fact that banks are highly utilizing the debt capital funds than equity capital funds. Therefore, the financial managers of both banking and insurance companies should make trustful and risky decisions as they use more debt funds in order to deploy the firms' financial resources as well as to maximize the profitability which would ultimately affect to increase shareholders wealth subsequently firm value.