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The IUP Journal of Accounting Research and Audit Practices:

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

Article Details

Pub. Date	: July, 2023
Product Name	: The IUP Journal of Accounting Research and Audit Practices
Product Type	: Article
Product Code	: IJARAP010723
Author Name	: Pinku Paul
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 09

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Abstract

Capital Structure (CS) of an organization and its composition has always affected its business performance and value creation. The selection of appropriate CS helps an organization to sustain its growth in the future. It is dependent on the level of financial leverage it is going to consider for optimal combination of CS. The study explores the impact of financial leverage on the business results of manufacturing firms in emerging economies like India for the period 2011 to 2021. The choice of appropriate combination of debt level will affect the profitability of a firm. It was found that there is an inverse association between Short-Term Debt (STD), Long-Term Debt (LTD) and size and business performance of the manufacturing industry in India. An empirical model was developed to analyze the impact on Return On Equity (ROE), Return on total Assets (ROA) and Return on Capital Employed (ROCE), which was found to be significant and established a negative association with financial leverage of firms.

Description

While the Capital Structure (CS) and value of a firm are always deemed to have an association, whether direct or indirect, Modigliani and Miller (1965) rejected it. The CS of the firm reflects the firm's borrowing policy and ascertains the level of debt and equity arrangement for optimal CS (Ross et al., 2001). Abor (2005) and Brealey et al. (2009) also stated that CS is nothing but the portfolio of different types of securities. The performance of a firm is associated with its CS decision (Brav et al., 2005). The firm's value and CS has an association, where the value increases as the debt level of the firm in the CS increases, which attracts more interest charges and provides tax savings for a firm. So, the firms, to take advantage of this, may continue to increase the level of debt up to 100%. But excessive use of debt has also its own disadvantages. It may subsequently downgrade the firm's credit rating, and possibility of financial distress increases, resulting in reduction in the value of the firm. This motivated the author of this paper to study the influence of CS of a firm on its business performance. The study explores the impact of financial leverage on the business results of