The impact of financial leverage on the wealth of shareholders relevant to the firms in Sri Lanka

Abstract

This paper investigates whether the financial leverage of a company injluences the value maximization objective of an organization. Also, what kind of leverage levels would result in maximizing the shareholders' wealth of companies?Oliecau.se maximizing the shareholders' wealth is one of the important issues for management of the listed companies. The financial data from 60 listed companies in the Colombo Stock Exchange covering eight different sectors for a period of ten years from 1992 to 2001 are gathered and analyzed. The results do not show any clear relationship between financial leverage and shareholders' wealth among the selected sample companies. Besides, as the size of the sampling is small any findings could not be conclusively established as dependable. The findings expose evidence, which are contrary to strength of most western theories. Hence, Sri Lankan firms should bear this in mind when deciding the optimal capital mix.