Capital Structure and Firm Performance: A Study on Top 147 Non-Financial Companies in India

Purpose This study aims to investigate the influence of the capital structure (measured by book leverage) of a company on its financial performance using the top 100 non-finance firms listed in the National Stock Exchange (NSE) from 2010–11 to 2021–22. Design/methodology/approach This study has used the random-effect panel regression model to determine the relationship between capital structure and firm performance. The main source of data is the Capitaline database. Capital structure has been measured through book leverage (BLEV) and long-term debt to total assets ratio (LTDTA), whereas firm performance has been measured through Tobin’s Q and ROA. A sample of 147 NSE-listed companies belonging to different industries has been chosen for this study. The study has been validated by using a two-stage difference-generalised method of moments (GMM) model. Findings The study has shown that capital structure has a significant adverse influence on firm performance after controlling for the effects of asset tangibility and firm size. However, the findings reveal that turnover representing the firm size and asset tangibility bears no association with firm performance. The results endorse the usefulness of agency cost theory in the case of NSE-listed companies in India. The empirical results are validated using a dynamic panel-data approach, with two-stage difference GMM, and remain robust. Originality/value Theoretically, this study extends the existing literature on capital structure by offering new evidence from a developing and prospective market like India. In practical terms, the findings of this study would help the stock exchange regulators and other regulatory bodies in the proper management of debt, as it could influence firm performance. The outcome of the study shows the relevance of the agency cost theory of capital structure and the influence of capital structure on financial performance.