Abstract:
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This study empirically examines whether the pecking order model is able to explain the
financing behavior of listed manufacturing companies in the CSE. The research examines
the problem of does the pecking order hypothesis explain the financing behavior of listed
manufacturing companies in the Colombo Stock Exchange (CSE)? If not what are the
recommendations and forecasts we can predict as to how the capital structure should be in
future. The sample used in this study consists of 32 manufacturing firms listed in CSE. All
the collected data are secondary in nature and they were collected from the firms’ financial
statements from financial year 2015/2016 to financial year 2019/2020. A time series
analysis is also performed using key variables of 29 companies from 2010/2011 to
2019/2020. The results of the analysis indicate that profitability is the most important
variable that explains the changes in debt level. Overall the results of the analysis showed
no support for pecking order in Sri Lankan manufacturing sector. The findings of the study
indicated that significant part of the variation in debt level can be explained by the
tangibility, firm size, profitability and financing deficit. Many Manufacturing forms
utilized these low interest to fund their operations in the middle of the pandemic situation
in the country. Overall the results of the analysis showed no support for pecking order in
Sri Lankan manufacturing sector. Through the findings this study suggests that as this
research did not use any specific country factors, it restricted the generalization of the
research findings to other developing countries. Therefore, it is recommended to conduct
further studies in this area.
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