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Literature Review

The research is about whether the corporate governance factors change the capital structure of
manufacturing companies listed in CSE. The financial condition of a company is depend on
assets it own and liabilities it has to pay. The profitability of a company is depend on capital
structure decisions. The successful selection and use of capital is one of the key elements of
the firm’s financial strategy (Velnampy and Aloy Niresh, 2012 )

Wen et al (2002) found the relationship between corporate governance and capital structure by
analyzing data of Chinese listed companies. After conducting the study it revealed that due to
strict rules and regulations, managers of the Chinese firms do not employ debt to keep the risk
of default at low level. The small numbers of outside directors in the firms, the large numbers
of outside directors in the board of directors and attractive salary and bonus of CEO are the
reasons for employing low debt.

Locke S and Wellalage N.H (2012) examined the linkages between corporate governance and
capital structure decisions in listed businesses in Sri Lanka. The results find the issue of
corporate governance has important implications on the financing decisions of Sri Lankan
listed firms.

Rajendran K (2012) researched on the impact of corporate governance on capital structure of

28 Sri Lankan Manufacturing firms and examined the corporate governance mechanism
driving firm’s choice of capital structure. The study revealed positive relationship between
leverage and board size, board meeting, proportion of non-executive directors and leadership

Rehman M.A, Rehman R.U and Raoof A (2010) investigated on capital structure changes due
to corporate governance in 19 banks in Pakistan. Findings of the study show that all
independent variables are positively related with capital structure except ownership
concentration which affects adversely to capital structure but overall there is an insignificant
relationship between capital structure and corporate governance.

Abor (2007) did a study on Capital structure, Corporate governance, debts, financing on listed
firms in Ghana. The results indicated that listed firms in Ghana pursue high debt policy with
larger board size, higher percentage of non-executive directors and CEO duality. In addition to
these it showed a negative relationship between the tenure of the CEO and capital structure,
suggesting that entrenched CEOs employ lower debt in order to reduce the performance
pressures associated with high debt capital.
Research Methodology
This research is a data-based research and it will utilize secondary data from companies listed
in Colombo Stock Exchange (CSE) in Sri Lanka.

Sample Size

All 35 manufacturing companies listed on CSE are selected for this study. The study will
contain five years data from 2008-2012 to examine whether corporate governance lead to a
change in the capital structure of manufacturing Companies.

Data Collection

Data for this research is selected from CSE website and annual reports of all listed
manufacturing companies in CSE.


Corporate Governance will take as independent variable and capital structure will use as
independent variable in this study. The proxy variables of corporate governance are ownership
concentration, board size, number of meetings held during the year, managerial ownership and
board independence.

Construction of independent and dependent variables related to capital structure and corporate
governance can be shown as below.

Capital Structure (CS)= Total debt/ Total equity+ Total debt

Ownership Concentration (OC)=Top 20 share/ Total share

Board Size (BS)= Total number of directors

Number of meetings during year (NMDY)= Total number of meetings held within one year

Managerial Ownership (MO)= Share held by CEO, Directors and Family and Child/Total share

Board Independence (BI)= Non-executive directors in the Board/ Total number of directors

Regression Analysis

Ordinary Least Square (OLS) method is applied to find the relation between both independent
and dependent variables.

CS=α+ β1OC+β2 BS+ β3 NMDY+β4 MO+β5 BI+μ

In above model CS represents dependent variable and OC, BS, NMDY, MO, and BI are the
independent variables. β1, β2 , β3 , β4 and β5 shows the co-efficient of independent variables,
α denote fixed effect on capital structure and μ represent the standard error.

Conceptual Frame Work

Corporate Governance Capital Structure

Board Size Total debt to equity ratio

Managerial Ownership

Ownership Concentration

Number of meetings
during year

Board Independence