Published Online:January 2025
Product Name:The IUP Journal of Applied Finance
Product Type:Article
Product Code:IJAF040125
DOI:10.71329/IUPJAF/2025.31.1.128-140
Author Name:Narasing Seetaram Devi and A S Shiralashetti
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:128-140
This paper examines the impact of financial leverage on the financial performance of power generation and distribution companies listed on the National Stock Exchange. For this purpose, the top eight companies, based on their market capitalization, are selected and studied over 10 years from 2014 to 2023. ROA, ROE, and ROCE are proxies for firm performance, and debt-to-equity ratio is a proxy for financial leverage. Firm size and firm age are taken as control variables. Descriptive statistics, Pearson’s correlation, and panel regression models are employed to examine the data. The impact of leverage on performance is assessed with fixed effects and random effects regression models. The results reveal that leverage has a significant negative impact on firm performance. The proposed reason for the negative impact might be financial distress caused by the excessive use of debt as per the agency cost proposition. On the other hand, control variables are also found to be significant influencers of firm performance.
One of the most important considerations a company must make is regarding its capital structure, including the ideal debt-equity mix. Debt, preferred stock, and common stock make up the capital structure, which is utilized to fund business initiatives.