Debt Structure, Firm Characteristics, and Stock Market Returns: A Panel Analysis of Emerging Economies

Financial leverage represents a critical corporate financing decision because debt can enhance shareholder returns while simultaneously increasing financial exposure, particularly in emerging economies characterized by volatile macroeconomic and financial conditions. This study investigates the relationship between financial leverage and stock market returns among non-financial firms across seven emerging economies: Pakistan, India, Bangladesh, Sri Lanka, Malaysia, Turkey, and Egypt. The analysis employs a balanced panel of 55 listed non-financial firms observed from 2013 to 2022. Financial leverage is measured through the debt-to-equity ratio, debt-to-assets ratio, and interest coverage ratio, while return on assets, earnings per share, and firm size are incorporated as firm-specific controls. Economic growth, policy interest rate, inflation, and exchange rate are included to account for macroeconomic influences on equity performance. The empirical findings reveal that both the debt-to-equity ratio and debt-to-assets ratio have positive and statistically significant effects on stock market returns, indicating that greater debt utilization is associated with higher shareholder returns after controlling for firm and macroeconomic characteristics. In contrast, interest coverage does not exert a statistically significant independent effect on stock returns. Profitability consistently improves stock market performance, whereas the influence of earnings per share and firm size varies across model specifications. Among macroeconomic factors, economic growth positively affects stock returns, while higher policy interest rates exert a significant negative effect. Inflation displays a positive association with stock returns, whereas exchange-rate movements remain statistically insignificant. Country- and sector-level comparisons further reveal considerable heterogeneity in leverage structures, profitability, debt-servicing capacity, and equity performance. The study contributes to emerging-market corporate finance literature by combining multiple leverage measures, market-based performance, firm characteristics, and macroeconomic conditions within a unified cross-country panel framework, providing broader evidence on the leverage–stock return relationship across heterogeneous emerging economies.