Impact of Financial Leverage on Corporate Performance: Evidence from Indian Power Sector

Abstract

This paper examines the impact of capital structure on corporateperformance. The study is based on secondary data of sixteenlisted large-sized power sector companies forming part of theBSEPOWER index as identified from the Capitaline database forthe period 2006-2017. The corporate performance is proxied
using two accounting measures viz. return on asset (ROA) andreturn on equity (ROE). Leverage is taken as the independentvariable which is measured not only by the overall debt-equityratio but also long-term and short-term debt ratios. The squareof these leverage measures is taken to test the linearity of the
relationship. The control variables include size, tangibility,liquidity and age of the firm. The study reveals a mixed result.While the impact of leverage on ROE is positive, the impact onROA is negative. ‘Size’ shows a significant negative effect in allcases in contrast to positive effect in few cases only. Liquidityand operating expense ratio do not have a significant influenceon corporate performance.