This study examines the connection between financing decisions and performance performance of Indian companies. We prepared and analyzed fourteen years of financial data of non-financial enterprises listed on the NSE and BSE, in total 200 enterprises, between 2010 and 2024. As our sources of empirical data, we focus on capital-structure measures, especially on the debt ratio, debt to equity ratio and long term debt ratio, and as our indicators of performance, we use ROA, ROE, NPM, and the diagnostics of Hausman tests and multicollinearity and heteroscedasticity.
The results have shown that high leverage especially the application of long-term debt is likely to undermine profitability measures. The heavy dependence on debt increases the financial vulnerability and limits the operational performance. However, we find that the trade-off theory in terms of tax benefits can be used to increase ROE by moderate leverage levels, hence supporting the assumptions of the trade-off theory. In terms of market valuation, it is found that there is a slight negative relationship between leverage and market valuation meaning that the investors are still somewhat sceptical about highly indebted companies. These trends are echoing the larger emerging-market trends and highlighting unique features of India financial architecture which are determined by the changing regulations and a corporate debt market that is still emerging as compared to the mature economies.
Our paper is a contribution to the literature that provides multisector longitudinal empirical data. It also provides practical information to financial managers, investors and regulators that are based in the Indian environment..