Impact of Capital Structure on Firm Performance: Evidence from Indian Listed Companies

Abstract

The study uses panel regression methods, particularly Fixed Effects and Random Effects models, to analyse the relationship between leverage and firm performance. The Hausman specification test is applied to identify the most suitable model for the analysis. Firm performance is measured through Return on Assets, Return on Equity, and Tobin’s Q, which represent both accounting-based and market-based performance indicators. Capital structure is measured using Debt-to-Equity Ratio and Total Debt to Total Assets.Capital structure decisions are an important part of corporate financial management because they determine how a firm finances its assets, operations, and future growth. The choice between debt and equity affects a company’s profitability, financial risk, cost of capital, and overall market value. This study examines the impact of capital structure on firm performance with special reference to Indian listed companies. The research is based on panel data collected from 120 non-financial companies listed on the National Stock Exchange (NSE) of India for the period 2015 to 2024.The results show that leverage has a statistically significant negative effect on firm performance. This indicates that firms with higher levels of debt may experience lower profitability due to increased interest costs, repayment pressure, and financial risk. The Hausman test supports the use of the Fixed Effects model, suggesting that firm-specific characteristics play an important role in explaining performance differences among companies.Overall, the study highlights the need for Indian firms to maintain an optimal balance between debt and equity. The findings contribute to the existing body of finance literature, particularly in the context of emerging markets, and provide useful insights for corporate managers, investors, and policymakers in making sound financing decisions.