Impact of long term financing policy on firm value of listed companies in Colombo stock exchange in Sri Lanka

Abstract

All business from huge to small business enterprise needs proper financing policy of its long-term capital and a suitable capital structure since the finance manager is expected to maximize the wealth of owners. To achieve this objective, the financial manager has to take a number of decisions. Among these the most important decisions are the investment, financing, liquidity and dividend decisions. Value of a firm and long term financing has been the most important in financial management to maximize the wealth of owner. it is playing a vital role in the financial management in the recent years. Therefore, it is necessary to identify the impact of the long term financing policy on the value of the firm. Hence this study was undertaken with the objectives of examining the significant impact of long term financing policies on the firm value and to find out the significant relationship between long term financing and firm value of listed companies in Colombo stock exchange (CSE) in Sri Lanka over the period from year 2011 to 2015. For this study the researcher used 40 listed companies from four sectors; manufacturing, food, beverages and tobacco, Hotels and travels and plantation in CSE in Sri Lanka. Price earnings ratio was used as a dependent variable and long term debt to equity ratio used as independent variables. The data were analyzed and hypotheses were tested through correlation and regression analysis by using SPSS (Version 20). The findings revealed that 16.2% of the firm’s value is explained by the given independent variable of long term financing policy and the remaining 83.8% of the variance is explained by the other factors which are out of the scope of this study. Further findings revealed that long term financing policy has a significant impact on the firm value and also long term debt to equity ratio has a high significant positive relationship with price earnings ratio.