IMPACT OF CAPITAL STRUCTURE ON FIRMS’ PROFITABILITY: EVIDENCE FROM LISTED INSURANCE COMPANIES IN COLOMBO STOCK EXCHANGE

Abstract

In recent years, many insurance companies in Sri Lanka encounter profitability issues due to adopting adverse capital structure decisions. Accordingly, this study examines the impact of capital structure on a firms’ profitability using all the listed insurance companies in the Colombo Stock Exchange over the period of 2015 - 2019. The capital structure is measured using the Debt to Asset Ratio (D/A) and Debt to Equity Ratio (D/E), while Return on Assets (ROA) and Return on Equity (ROE) are used to measure the firms’ profitability.Using the random effect panel regression methodology, the study finds that D/E and D/A have negative and statistically significant ROA and ROE of Sri Lankan listed insurance companies. According to the findings of the study, it is recommended to implement a conservative capital structure strategy, focusing on minimizing debt capital and maximizing equity capital from their total capital structure, as this has the most significant impact on the profitability of listed insurance companies in the CSE.