THE IMPACT OF THE FIRMIS CHARACTERISTICS ON THE RELATIONSHIP BETWEEN THE CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF BANKS AND DIVERSIFIED FII{ANCIAL SECTOR IN SRI LANKA

Abstract

The purpose of this study was to establish The impact of the firm's characteristics on the relationship between the capital structure and financial performance of bardcs and diversified financial sector in Sri Lanka. The study developed on secondary data consisting of audited financial statements from 10 banks and l5 diversified financials at the CSE totalingto 25 firms for five-year period (20T5 to 2019). The objective of the study was to establish the impact of the firm's characteristics on the relationship between the capital structure and financial performance of banks and diversified financial sector in Sri Lanka. STDAR, LTDAR and DER represented capital structure proxies; ROA represented financial performance while size and age represented Firm characteristics. The study was anchored on positivism paradigm and guided by the following capital structure theories: static trade-off theory, pec\ing order theory and agency theory. Descriptive statistics and inferential statistics were used to analyze data. Multiple regressions were applied to establish the extent ofthe impact ofthe firm's characteristics on the relationship between the capital structure and financial performance of banks and diversified financial sector while Pairwise correlation was used to analysis relationship between capital structure and firm performance and Random effect model was to analysis impact of firm characteristics on the relationship between capital structures and financial performance. The study concluded of established significant positive moderating effect of firm size characteristic on the relationship between capital structures and financial and negative moderating impact of firm age characteristic on the relationship between capital structures and financial. In improving financial performance, it was recommended that firms invest in easily re-locatable and quality. Future studies to investigate other factors that account for variability in financial performance and other firm's characteristics on the relationship between the capital structure and financial performance of banks and diversified financial sector in Sri Lanka