Study of Business Companies in Colombo Stock Exchange

Study of line of merchandise Companies in Colombo Stock Exchange bully social construction is or so significant discipline of companys operations. The Study attempts to identify the preserve of metropolis coordinate on Companies Performance. The analyze has been made financial social class from 2005 to 2009 (05 years) pecuniary year of pipeline companies in Sri Lanka. The events shown the human birth mingled with the keen anatomical expression and financial motion is damaging association at -0.114.. F and t set ar 0.366, -0.605 respectively. It is reflect the insignificant aim of the Business Companies in Sri Lanka. indeed Business companies ab show uply depend on the debt heavy(p). So that, they acquit to wear beguile expenses much.1. IntroductionTo understand how companies finance their operations, it is necessary to examine the de experimental conditioninants of their backing or dandy social organisation decisions. Company financing decisions invol ve a wide range of constitution issues. At the private, they have implications for smashing food market development, interest govern and security price intention, and regulation. At the private, such decisions be active great twist, corporate boldness and company development (Green, Murinde Suppakitjarak, 2002). Knowledge most outstanding bodily buildings has loosely been derived from selective information from developed economies that have many institutional similarities (Booth 2001). It is chief(prenominal) to note that different countries have different institutional arrangements, in general with respect to their tax and bankruptcy codes, the existing market for corporate book, and the roles banks and securities markets play. majuscule coordinate refers to a mixture of a variety of long term sources of coin and blondness shares including reserves and surpl drills of an enterprise. The historical attempt to building scheme of detonator organize began with the presentation by Modigliani miller (MM)(1958). They revealed the situations under what conditions that the enceinte grammatical construction (CS) is relevant or irrelevant to the financial surgical procedure of the listed companies. most of the decision making process related to the CS are deciding factors when determining the CS, a number of issues e.g. cost, various taxes and rate, interest rate have been proposed to explain the variation in Financial Leverage across fast(a)s (Van Horne,1993 Hampton,1998 Titman Wessels,1998).these issues suggested that the depending on attributes that caused the cost of various sources of great the firms select CS and benefits related to debt and equity financingThe kinship amid keen building and financial operation is one that received considerable attention in the finance literature. How important is the concentration of control for the company doing or the type of investors exerting that control are questions that authors have tried to answer for long time forward studies show that capital structure has relating with corporate governance, which is the key issues of state owned enterprise. To take away the effects of capital structure or financial mathematical process, allow help us to know the potential problems in performance and capital structure.2. Literature ReviewModigliani and Miller(M M)(1958) wrote a wallpaper on the irrelevance of capital structure that inspired researchers to debate on this subject. This debate is still continuing. However, with the pass of time, modernistic dimensions have been added to the question of relevance or irrelevance of capital structure. MM declared that in a world of frictionless capital markets, at that place would be no optimal financial structure (Schwartz Aronson, 1979). This possible action later became known as the Theory of Irrelevance. In M Ms over-simplified world, no capital structure mix is better than an opposite. M Ms Proposition-II attem pted to answer the question of why there was an gaind rate of harvest-festival when the debt ratio was increased. It stated that the increased expected rate of return generated by debt financing is exactly offset by the risk incurred, heedless of the financing mix chosen.Brander and Lewis (1986) and Maksimovic (1988) provide the theoretical framework that links capital structure and market structure. Contrary to the winnings maximization aim postulated in industrial organization literature, these theories are similar to the corporate finance theory in that they assume that the firms objective is to maximize the wealth of shareholders. Furthermore, market structure is shown to affect capital structure by influencing the competitive behavior and strategies of firms.Firms in an oligopolistic market result follow the strategy of maximizing their yield in favorable economic conditions to optimize shekelsability (Brander Lewis 1986). The theory also holds in unfavorable economic conditions firms would pee a cut in yield and reduce their wageability. Shareholders, though, while enjoying increased wealth in good periods, draw to ignore a decline in profitability in distressing times. This is due to the fact that unfavorable consequences are passed in to lenders because of shareholders limited financial obligation status. in that locationfore, the oligopolistic firms, in contrast to firms in competitive markets, would employ prouder levels of debt to enkindle more when opportunities to earn higher profits arise. The implied prediction of the output maximization hypothesis is that capital structure and market structure have a plus relationship. In corporate finance, the agency costs theory supports the use of high debt, and it is consistent with the prediction of the output maximization hypothesis.Jensen and Meckling (1976) argue that the shareholders-lenders departure has the effect of shifting risk from shareholders and of appropriating wealth in th eir favor as they take on risky enthronization projects (asset substitution). Hence, shareholders, and managers as their agents, are prompted to take on more borrowing to finance risky projects. Lenders receive interest and principal if projects succeed, and shareholders appropriate the residual income however, it is the lender who incurs the loss if the project fails. It is trying and costly for debt holders to be able to assess and monitorHuson, and Nazrul Hisyam. (2008) examined that the relationship amid ownership structure and company performance has been issue of interest among academics, investors and policy makers because of key issue in understanding the effectiveness of alternative governance system in which government ownership serve as a control mechanics. Therefore, this study examines the impact of alternative ownership/control structure of corporate governance on firm performance among government united companied (GLCs) and Non-GLC in Malaysia. It is believed that government ownership serve as a observe device that lead to better company performance after compulsory company specific characteristics. We used Tobins Q as market performance tax while ROA is to determine accounting performance measure. This study is based on a sample of 210 firms over a period from 1995 to 2005. We use control panel based regression approach to determine the impact of ownership mechanism on firms performance. Findings appear to suggest that there is a significant impact of government ownership on company performance after haughty for company specific characteristics such as company size, non-duality, leverage and growth. The finding is off significant for investors and policy marker which will serve as a guiding for better investment decision.Mohammed Omran (2001) evaluates the financial and operating performance of newly privatized Egyptian state-owned enterprises and determines whether such performance differs across firms according to their new ownershi p structure. The Egyptian privatization program provides unique post-privatization data on different ownership structures. Since most studies do not distinguish between the types of ownership, this paper provides new insight into the impact that post-privatization ownership structure has on firm performance. The study covers 69 firms, which were privatized between 1994 and 1998. For these newly privatized firms, these study documents significant increases in profitability, operating efficiency, capital expenditures, and dividends. Conversely, significant decreases in employment, leverage, and risk are found, although output shows an insignificant decrease following privatization. The results also show that Egyptian state-owned enterprises, which were exchange to anchor-investors and employee shareholder associations, seem to outperform other types of privatization, such as nonage and majority initial public offerings.B.Nimalathasan and Brabete (2010) pointed out that Dept equity ra tio is verificatoryly and strongly associated to all profitability ratios in Listed Manufacturing Companies.3. Conceptual Frame persistestablish on the Litteratures, the following conceptual model is constructed. It shows that hypotgesized the relationship between capital structure and Performance of listed Business companies in Sri LankaDebt EquityCSGP NPFPROEROI4. ObjectivesThe main objective is to find out the impact of outstanding Structure on Financial Performance of the Business companies in Srilanka.To achieve the to a higher place objective the following sub objective are consideredTo identify the relationship between capital structure and performanceTo determinants of a capital structure5.0 HypothesesThe following hypothesis is formulated for the studyH1- The capital structure has significant impact on financial performance.H2- pileus structure is significantly correlated with financial performance6.0 MethodologyTo produce the higher up mentioned research objective, t he data for this study was gathered from the financial statements as promulgated by Business Companies. In addition, another source of data was through with(predicate) reference to the review of different articles, papers, and relevant previous studies. For this purpose, collecting data of Business firms is used which are listed on Colombo Stock Exchange.. to each one(prenominal) firms are taken for the study representing the period of 2005-2009, and the average entertains of each item was considered for the purpose of ratio computation and summary.6.1 Mode of Analysis1. groovy structureRole of debt and equityDebt cytosineequityDebt 100Total fundsTotal funds2.Financial Performance pull in profitGross profit 100Net SalesNet SalesNet profit Net profitNet profit 100SalesROAPAIT 100AssetsROI/ROCEInvestmentPBIT 100Equity7. Results and Discussions7.1 Correlation AnalysisCorrelation is annoying describing the strength of relationship between both variables. In this study the corre lativity co-efficient analysis is under taken to find out the relationship between capital structure and financial performance. It can be said that the what relationship exist among variablesCapital structure correlated withR value R2 valueGross profit 0.360 0.1296Net profit 0.110 0.0121ROI -0.104 0.0108ROA -0.196 0.0384Performance -0.114 0.01297.1.1 Capital structure and Gross profit remit IVariablesCapital structureGross profitCapital structure10.360Gross profit0.3601It shows the relationship between crying(a) profit and capital structure variables. There is a delicate positive relationship between both variables. The correlativity is 0.360. significant level is 0.01. the co-efficient of determination is 0.1296. that is only 12.96% of variance in the capital structure is accounted by the unrefined profit.So, There is a weak positive relationship between capital structure and gross profit7.1.2 Capital structure and Net profit card IIVariablesCapital structureNet profitCapital structure1-0.110Net profit-0.1101It illustrates the relationship between net profit and capital structure variables. There is a weak oppose relationship between two variables. The correlational statistics is -0.110. Significant level is 0.01. The co-efficient of determination is 0.0121. That is only 1.21% of variance in the capital structure is accounted by the net profit.7.1.3 Capital structure and ROITable IIIVariablesCapital structureROICapital structure1-0.104ROI-0.1041It indicates the relationship between ROI and capital structure variables. There is a weak oppose relationship between two variables. The correlation is -0.104. Significant level is 0.01. The co-efficient of determination is0.0108. that is only 1.08% of variance in the capital structure is accounted by the ROI.7.1.4 Capital structure and ROATable IVVariablesCapital structureROACapital structure1-0.196ROA-0.1961It shows the relationship between ROA and capital structure variables. There is a weak negative rel ationship between two variables. The correlation is -0.196 significant level is 0.01. the co-efficient of determination is 0.0384. that is only 3.84% of variance in the capital structure is accounted by the ROA.7.1.5 Capital structure and Financial performanceTable VVariablesCapital structureFinancial performanceCapital structure1-0.114Financial performance-0.1141It illustrates the relationship between performance and capital structure variables. There is a weak negative relationship between two variables. The correlation is -0.114. Significant level is 0.01. The co-efficient of determination is 0.0129. that is only 1.29% of variance in the capital structure is accounted by the performance.7.2 retroflexion AnalysisRegression analysis is used to test the impact of financial performance on capital structure of the listed companies traded in Colombo crinkle exchange7.2.1 Capital structure and Gross profitTable VI stickerRR agoraAdjustedR consecutiveStd.Error of the Estimate10.360a0 .1290.0980.32306The above board shows the weak positive correlation between the capital structure and gross profit.Table VIIModelUn regulariseCoefficients exchangeableCoefficientstsigBStd.ErrorBeta1(constant)Capital structure0.1870.0470.0730.0230.3602.5562.0390.0160.051The above slacken indicates the coefficient of correlation between the capital structure and gross profit. multiple r2 is 0.1296. only 1.29% of variance of gross profit is accurate by the capital structure. But, be 98.21% of variance with gross profit is attributed to other factors.7.2.2 Capital structure and Net profitTable VIIIModelRR unbentAdjustedR SquareStd.Error of the Estimate10.110a0.012-0.0230.36514The above table shows the weak negative correlation between the capital structure and net profit.Table IXModelUn standardizedCoefficientsStandardizedCoefficientstsigBStd.ErrorBeta1(constant)Capital structure0.124-0.0150.0830.026-0.1101.498-0.5840.1450.564The above table indicates the coefficient of correlatio n between the capital structure and net profit. Multiple r2 is 0.012. altogether 1.2% of variance of net profit is accurate by the capital structure. But, remaining 98.8 % of variance with net profit is attributed to other factors7.2.3Capital structure and ROITable XModelRR SquareAdjustedR SquareStd.Error of the Estimate10.104a0.011-0.025115.19484The above table shows the weak positive correlation between the capital structure and ROI.Table XIModelUn standardizedCoefficientsStandardizedCoefficientstsigBStd.ErrorBeta1(constant)Capital structure31.283-4.56326.0508.250-0.1041.201-0.5530.2400.585The above table indicates the coefficient of correlation between the capital structure and ROI. Multiple r2 is 0.011. nevertheless 1.1% of variance of ROI is accurate by the capital structure. But, remaining 98.9% of variance with ROI is attributed to other factors7.2.4 Capital structure and ROATable XIIModelRR SquareAdjustedR SquareStd.Error of the Estimate10.196a0.0390.0040.10866The above ta ble shows the weak positive correlation between the capital structure and ROA.Table XIIIModelUn standardizedCoefficientsStandardizedCoefficientstsigBStd.ErrorBeta1(constant)Capital structure0.099-0.0080.0250.008-0.1964.020-1.0600.0000.298The above table indicates the coefficient of correlation between the capital structure and ROA. multiple r2 is 0.039. only 3.9% of variance of ROA is accurate by the capital structure. But, remaining 96.1% of variance with ROA is attributed to other factors7.2.5 Capital structure and Financial performanceTable XIVModelRR SquareAdjustedR SquareStd.Error of the Estimate10.114a0.013-0.0220.98395The above table shows the weak positive correlation between the capital structure and performance.Table XVANOVAb.3541.354.366.550a27.10928.96827.46329RegressionResidualTotalModel1Sum ofSquaresdf pixilated SquareFSig.Predictors (Constant), Capital_structurea.Dependent Variable Performanceb.Table sixteenModelUn standardizedCoefficientsStandardizedCoefficientstsigB Std.ErrorBeta1(constant)Capital structure0.704-0.0430.2230.070-0.1143.162-0.6050.0040.550The above table indicates the coefficient of correlation between the capital structure and performance. multiple r2 is 0.013. only 1.3% of variance of performance is accurate by the capital structure. But, remaining 98.7% of variance with performance is attributed to other factors.8. Concluding RemarksCorrelation analysis explains, there is a weak positive relationship between gross profit and capital structure (0.360).at the same time, there is a negative relationship between net profit and capital structure (-0.110).it reflects the high financial cost among the firms. ROI and ROA also has negative relationship with capital structure at -0.104, -0.196 respectively.It is focused on the overall point of view of the relationship between the capital structure and financial performance. There is a negative association at -0.114. Co-efficient of determination is 0.013. F and t values are 0.366, -0.60 5 respectively. It is reflect the insignificant level of the Business Companies in Sri Lanka.Business companies mostly depend on the debt capital. Therefore, they have to pay interest expenses much.8.1 Testing of Hypothesesstatistical Techniques ResultsCorrelation -0.114Co efficient of determination -0.0129Based on the semiempirical results of this study, H1this hypothesis come false .Because in this study the empirical results shows that there is a insignificant negative relationshipH2 There is a positive relationship between the capital structure and firms financial performance?.At the first step of testing the hypothesis(H1), hypothesis (H1) was considered and tested for its validity. It has the following result between the capital structure and firms financial performance measured by performance measures such as ROA , ROI ,Net profit margin and etc. Based on the above evidence gathered, the H2 was rejected. Because research result is negative relationship between the capital st ructure and firms financial performance.H0 there is a negative relationship between the capital structure and firms financial performance?.after the rejection of H1, the Null hypothesis (H0) was tested for its validity. H0 was accepted based on the above evidence gathered. it has been provided that there is a negative relationship between the capital structure and firms financial performance(-0.114).9.0 Suggestions and RecommendationsThe following suggestions are recommended to increase the Companys financial performance based on capital structure.Performance standards should be established and communicated to the investors. This will help investors to achieve the standard and take better investment decisions.Identifying weaknesses of investment may be best one to improve the firms financial performance, because it indicates the subject field which decision should be taken.Motivating the investors to help to achieve the high level of firms financial performance..Political changes a re very important factor in the share market. It is also determine the firm performance. Therefore, political should possible to increase the financial performance of the listed companies.Inflation and exchange rate also affect the listed companys performance. So, government should consider the economic growth to control the inflation.