Based on the agency theory, the purpose of this paper is to empirically investigate the impact of capital structure choice on firm performance in India as one of the emerging economies.
Fixed effect panel regression model is used to analyse ten years of data (2003-2012) on the sample units, to find the relation between leverage and firm performance after controlling for factors such as size, age, tangibility, growth, liquidity and advertising.
Empirical results suggest that leverage has a negative influence on financial performance of Indian firms, which is in contrast with the assumptions of agency theory as commonly received and accepted in other developed as well as emerging economies. Consequently, postulates of agency theory have to be seen with different perspective in India given the underdeveloped nature of bond markets and dominance of state-owned banks in lending to corporate sector.
The findings of the paper will enable the practitioners and analysts to understand as to why, in the bank-dominated debt financing system in India, leverage is negatively associated with firm performance.
The results of the study enrich the literature on capital structure and agency costs issues in several ways.
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