The Effects of Macroeconomic Conditions on Corporate Capital Structure: Evidence from Manufacturing Firms Listed in Colombo Stock Exchange

With the rapid development of the modern market economies, to safeguard the comprehensive competitiveness, companies adjust their capital structure based on the external and internal environments. Thus, in the selection of companies financing policies, especially the debt decisions, the macroeconomic conditions will be very critical. Hence, the purpose of this study is to examine the effects of macroeconomic conditions on capital structure decisions of manufacturing firms listed in Colombo Stock Exchange. A panel data covering a period of 10 years from 2004 to 2013 for 27 listed manufacturing firms in Colombo Stock Exchange used while fixed and random effects models were used to analyze the data. The empirical results demonstrate that in overall macroeconomic conditions have significant effects in determining the capital structure decisions of the manufacturing firms listed in Sri Lanka. The banking sector development is found to be significant in determining the capital structure decisions of Sri Lankan manufacturing firms while results further depict that the development of the stock market is insignificant in the capital structure choice of the Sri Lankan manufacturing companies. Moreover, GDP growth rate and inflation are found to be insignificant in determining the capital structure choice of the Sri Lankan manufacturing firms.