Consistency and controversy in corporate financing practices: Evidence from an emerging market

Abstract

Purpose

The main aim of this paper is to report on a comprehensive survey of corporate financing decision‐making process in Sri Lankan listed companies and to compare these results with those of similar studies conducted in developed markets.

Design/methodology/approach

The study was based on a survey questionnaire distributed among the chief executive officers (CEOs) of companies listed on the Colombo Stock Exchange, with the content of the questionnaire being based upon a review of theoretical and empirical literature in the field of finance.

Findings

The results demonstrate an adherence to a financial hierarchy, which appears to be the dominant financial policy among listed Sri Lankan companies. Corporate financing decisions seem to be influenced mostly by interest and tax considerations, while lesser weight is accorded to financial flexibility in determining the amount of funds to be raised externally through debt contracts. The evidence largely supports the propositions of the pecking order model, but also confirms some predictions found in static trade‐off theory.

Practical implications

Some of the most striking implications of the analysis relate to the under‐development of the local capital market, and the apparent need for an efficient financial system that spurs economic growth. An efficient capital market will in turn ensure that capital will be more easily channeled into financing investments.

Originality/value

This paper highlights how and why the determinants of capital structure decisions reported for developed capital markets may differ from those existing in transitional or emerging economies.

Citation

Colombage, S.R.N. (2007), "Consistency and controversy in corporate financing practices: Evidence from an emerging market", Studies in Economics and Finance, Vol. 24 No. 1, pp. 51-71. https://doi.org/10.1108/10867370710737382