Impact of Company-Specific Factors on Financial Leverage Decisions: An Empirical Panel Data Analysis of Listed Food, Beverage, and Tobacco Companies in Sri Lanka

Abstract

This study investigates the impact of company-specific factors on financial leverage decisions among food, beverage, and tobacco companies listed on the Colombo Stock Exchange in Sri Lanka. It specifically examines how profitability, liquidity, firm size, asset tangibility, and non-debt tax shields influence firms' capital structure decisions. A quantitative panel data analysis was conducted using a sample population of 48 listed companies over the five-year period from 2018 to 2022. The study employed fixed-effects and random-effects regression models to analyse the relationship between the selected firm-specific factors and two measures of financial leverage: The Debt-to-Assets and the Debt-to-Equity ratios. The results indicate that profitability and liquidity have a significant negative impact on the Debt to Assets ratio, showing that more profitable and liquid firms rely less on debt, as they have sufficient internal resources and can meet short-term obligations without borrowing. Asset Tangibility positively affects Debt to Assets ratio, suggesting that higher tangibility serves as collateral, encouraging lenders to offer more debt. Non-Debt Tax Shield negatively affects Debt to Equity, indicating that firms with substantial tax shields prefer equity financing to optimize tax benefits. Firm size, however, does not significantly affect financial leverage decisions. This research fills a gap in the literature by providing industry-specific, empirical evidence on the determinants of financial leverage within Sri Lanka’s food, beverage, and tobacco sectors, an area that has received limited scholarly attention.