Impact of Capital Structure on Firm Performance: Empirical Evidence from Indian Manufacturing Sector

Abstract

The present study has been carried out to investigate empirically the impact of capital structure on a firm’s performance in the Indian manufacturing sector from the year 2013 to 2022 and a comparative analysis of its findings with the results of previous studies. A sample of 51 firms from the Nifty India Manufacturing Index is selected for the study. The data are analyzed by employing the panel data technique and the random effect model is found to be consistent as per the results of Hausman test. The capital structure is proxied by debt-equity ratio, whereas return on equity (ROE) and return on assets (ROA) are used as firm performance indicators. Apart from these, some control variables such as firm size, liquidity, tangibility and growth are also included in the study. The results exhibit that the debt-equity ratio has a detrimental effect on the performance of the Indian manufacturing firms. This negative association is substantial when performance is measured using ROA as opposed to ROE. Among the control variables, only size revealed a negative relationship with firm performance. The comparative analysis highlighted that for the time being, the negative association between capital structure and performance is consistent over time for the developing nations. The outcomes of the study will have ramifications for the managers and policymakers responsible for decision making to enhance performance and will drive them to consider the influence of debt financing on performance before deciding the debt level. It also provides updated insights that can guide the strategic and financial decisions of the manufacturing firms in India.