Impact of capital structure on share prices with special reference to the plantation sector in Sri Lanka

Plantation sector has been recognized as an important strategic sector for socio-economic development of countries where this sector plays an important role in their economies. In the Sri Lankan context the plantation sector makes a significant contribution to Gross Domestic Product, foreign exchange earnings, employment and until recently to Government revenue. Hence, it plays a vital role in the economy. Consequently, the producers encounter several issues and challenges in the effort to enhance their profitability and reduce the threat of insolvency. Specifically, the Sri Lankan plantation sector is faced with the dilemma of maintaining an optimal capital structure which is directly influenced by the wealth of the firm. In this study an attempt has been made to explain and understand the relationship between the capital structure of the Regional Plantation Companies and the share price. This study is primarily based on secondary data that were extracted from the annual reports of 10 RPCs out of 20 which were listed in Colombo Stock Exchange (CSE) over the past seven year period from 2009 to 2015. These companies were selected by using random sampling method. Balanced Panel Data (BPD) of these 10 plantation companies were analyzed by using descriptive statistics and Ordinary Least Squire (OLS) regression model to establish the relationship between capital structure and the share price. Secondly, Pearson Correlation Analysis is used to describe the degree of association between capital structure and share price. The study found a negative relationship between the debt to equity ratio and the share price. Moreover, the study proved that there is a positive relationship between the interest coverage ratio and the share price. But it was revealed that the debt to total assets has no significant impact on the share price.