IMPACT OF CAPITAL STRUCTURE DECISION ON THE FINANCIAL PERFORMANCE OF SELECTED LIFE INSURANCE COMPANIES OF NEPSE

Abstract

Capital structure decision is a major area of financial management because the proportion of debt and equity used by an organization is associated with financing cost, financial leverage, risk, profitability and financial stability. The issue has particular importance in life insurance because insurers manage public funds, undertake long-term contractual obligations, meet policyholder claims and operate within regulatory solvency requirements. The Nepalese life insurance sector has expanded with financial-sector development, increasing awareness, urbanization, technological advancement and wider participation in the capital market. Within this setting, the relationship between financing decisions and financial performance requires sector-specific examination because evidence from manufacturing, banking and other industries cannot automatically represent insurance companies. The study focuses on selected life insurance companies listed on Nepal Stock Exchange, namely Nepal Life Insurance Company Limited, Life Insurance Corporation Nepal Limited, National Life Insurance Company Limited, Asian Life Insurance Company Limited and SuryaJyoti Life Insurance Company Limited. Capital structure is considered through debt-equity and leverage-related measures, while financial performance is examined through Return on Assets, Return on Equity, solvency indicators and underwriting results. The analysis also recognizes profitability, liquidity, firm size, growth opportunities and asset structure as relevant firm-specific factors. The theoretical discussion incorporates Net Income Theory, Net Operating Income Theory, Traditional Theory, Modigliani-Miller Theory, Trade-off Theory, Pecking Order Theory and Agency Cost Theory. These perspectives provide different explanations of financing behaviour and do not establish one predetermined relationship between leverage and performance. Accordingly, the relationship requires empirical examination within the Nepalese life insurance environment. The study is relevant to financial management because financing decisions must be considered alongside profitability, solvency, policyholder protection and long-term sustainability.