Influence Of Capital Structure On Firm Performance: Evidence From India

Abstract

This research study lays a primary emphasis on studying the relationship between the performance of a firm and the capital structure of the organization. Specifically, the focus is on the relationship between return on equity and return on assets. Throughout the course of this inquiry, a representative sample of 36 Indian companies that were trading on the Bombay Stock Exchange at some point between 2017 and 2022 was analyzed. These companies had been listed on the BSE at some point. These businesses exemplified a diverse cross-section of India's economic landscape. As dependent variables, we employed Earnings per Share (EPS), Return on Equity (ROE), Return on Assets (ROA), and Tobin's Q. On the other hand, Short-Term Debt Ratios, Long-Term Debt Ratios, and Total Debt Ratios were used as Independent Variables. The organization's capital structure is integrally tied to each of these several performance metrics, which in turn all influence one another. After applying the pooling panel data regression method, we arrived at the conclusion that EPS has a significant positive relationship with short-term debt, but a significant negative relationship with longterm debt. This result led us to the conclusion that EPS has a significant positive relationship with short-term debt. As a result of this, we arrived at the realization that EPS had an important positive association with short-term debt. ROA has a large and inverse relationship with the capital structure of the company, and this link is rather robust in its relationship. On the other hand, there is no association that can be established through statistical analysis that is statistically significant between the company's capital structure and its performance as measured by ROE and Tobin's Q. This conclusion can be reached because there is no correlation between the two factors. Due to the fact that there is no link between the two variables, one might arrive at this conclusion. In spite of the fact that there is a positive correlation between EPS and STDTA, we are still able to arrive at the conclusion that the capital structure of the company has a negative influence on the performance of the company. This is the case even though there is a positive correlation between EPS and STDTA. The Pecking Order Theory makes an assertion, which is supported by these facts, which indicate that the theory is consistent with them. These findings show that the theory is consistent with them.