Debt and Profitability: Evidence from Indian Firms

Posted: 22 Apr 2019

See all articles by Dr. Sasikanta Tripathy

Dr. Sasikanta Tripathy

Indian Institute of Technology Kharagpur; SRM University AP, Amaravati; NIT Jamshedpur

Date Written: November 30, 2017

Abstract

Capital structure has been a database issue in financial economics ever since Modigliani and Miller showed in 1958 that given frictionless markets and homogeneous expectations, the capital structure decision of the firm is irrelevant because it does not contribute towards the firm’s growth. The dilemma firms are faced with is making a decision on the capital structure choice to use. The purpose of this paper is to find out the effect of capital structure on financial performance of firms based on ROE, ROA, Tobin’s Q and EPS for the companies listed both at BSE and NSE over the period 2011-2016, measured through a simple regression model. Results indicate that Capital Structure is significantly and positively associated with firm Performance when measured by Tobin s Q, however they report a negative relationship between capital structure with firms’ performance when measured by ROA, and no significant relationship when measured by ROE as well as by EPS. Altogether, the study provides evidence which indicates firm performance is positively or even negatively related to capital structure. One important reason for this conflicting result can be the high cost of borrowing in developing countries like India. This study contributes to the empirical literature on the effect of capital structure on financial performance of Indian firms.

Keywords: Capital Structure, Performance of Firm, Panel Data, Regression

JEL Classification: D24, G31, C23, C31

Suggested Citation

Tripathy, Dr. Sasikanta and Tripathy, Dr. Sasikanta, Debt and Profitability: Evidence from Indian Firms (November 30, 2017). Available at SSRN: https://ssrn.com/abstract=3358722

Dr. Sasikanta Tripathy (Contact Author)

Indian Institute of Technology Kharagpur ( email )

Kharagpur
IIT Khragpur
IN
India

SRM University AP, Amaravati ( email )

Neerukonda
Mangalagiri
Guntur, IN 522502
India
9337026846 (Phone)

NIT Jamshedpur ( email )

Jamshedpur, IN Jharkhand 831014
India
7488186533 (Phone)

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