Capital structure plays a critical role in shaping the financial performance of firms, particularly in emerging markets like India where capital market dynamics, regulatory frameworks, and financing constraints differ from developed economies. This study examines the impact of capital structure on the financial performance of Indian listed companies across multiple sectors. Using panel data from a sample of firms listed on the National Stock Exchange of India and Bombay Stock Exchange, the analysis explores the relationship between leverage ratios (such as debt-to-equity and total debt ratios) and key performance indicators including return on assets (ROA), return on equity (ROE), and firm value. The study employs regression techniques to assess how varying levels of debt influence profitability and efficiency. The findings indicate that moderate use of debt can enhance firm performance due to tax advantages and disciplined management, consistent with the Trade-Off Theory. However, excessive leverage negatively affects financial performance due to increased financial risk and cost of capital. The results also provide partial support for the Pecking Order Theory, suggesting firms prefer internal financing before resorting to external debt. The study offers insights for corporate managers, investors, and policymakers in optimizing capital structure decisions to improve firm performance.
Wadhwa et al. (2026) studied this question.