Mediating Role of Capital Structure Between Determinants of Capital Structure and Firm Value: A Path Analysis Using Econometrics Model

Baroon A., Dayaratne D. A. I. and Menike L. M. C. S.
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Baroon A.: Sri Lanka Institute of Advanced Technological Education, Sri Lanka
Dayaratne D. A. I.: Sabaragamuwa University of Sri Lanka, Sri Lanka
Menike L. M. C. S.: Sabaragamuwa University of Sri Lanka, Sri Lanka

International Journal of Research and Innovation in Social Science, 2025, vol. 9, issue 6, 5604-5616

Abstract: This study investigates the mediating role of capital structure between the determinants of capital structure and firm value, with a focus on non-financial firms listed on the Colombo Stock Exchange. A sample of 90 firms from twelve industry sectors was analyzed for the period of 8 years from 2013 to 2020 using secondary data extracted from financial reports. The research categorizes variables into three constructs: firm value (dependent variable), capital structure (mediating variable), and determinants of capital structure (independent variables), which include firm-specific attributes such as profitability, asset tangibility, liquidity, firm size, growth opportunity, and earning volatility and corporate governance practices such as board size, board composition, managerial ownership, board meetings, and CEO position. Employing an econometric model and the Sobel test for multiple independent variables, the results reveal that capital structure significantly and partially mediates the effects of profitability on firm value. Moreover, profitability, board size, and board meetings exhibit significant direct effects on firm value. This study contributes to the literature by providing empirical evidence on the indirect effects of profitability via capital structure mediation on firm value in the Sri Lankan context and demonstrates how path analysis can be applied to panel data with multiple independent variables using econometrics models.

Date: 2025
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