The Impact of Capital Structure on Financial Performance: Evidence from Life Insurance Firms Listed on the Colombo Stock Exchange (CSE) In Sri Lanka

Abstract

Introduction: The optimal capital structure levels and capital structure decisions that impacts on how a firm performs have been a great dilemma for many. Capital structure decisions have an impact on the growth and profitability of a firm, as these decisions enable firms to maximize their shareholders' wealth. The major research objective was to determine to identify the impact of capital structure on the financial performance of life insurance companies listed at the CSE in Sri Lanka.

Methodology: To justify the research findings, a descriptive research design was used to describe the relationship between the dependent variables and independent variables. The data collected for examination purposes was purely secondary, as it was extracted from the annual reports and financial statements of the listed firms. The target population was all the life insurance firms listed on the CSE. Eight firms were listed and formed part of the study’s population. Data analysis was done via multiple regression analysis, descriptive statistics, and correlation analysis. For the significance level of the hypothesis, a confidence interval of 95 % was used. The analytical model used was financial performance as the dependent variable, taking ROA as the measure. Total debt ratio, debt-to-equity ratio, and leverage were the independent variables. Firm size and growth rate were the control variables. The financial ratios were calculated using a Microsoft Excel spread sheet using data obtained for a seven-year period (2017–2023).

Findings: The findings show debt to equity, firm size, and growth rate are all positively and significantly associated with financial performance, while total debt ratio and leverage are not significantly associated with financial performance. The findings reveal that capital structure affects the financial performance of life insurance firms at the CSE.

Conclusion: In view of this, it is recommended that life insurance firms that are capable of funding their operations through retained earnings do so and reduce their borrowings, as this will boost their overall performance.