Authors : S. Aramvalarthan, M. Kannadhasan and Ashwini Babu
Abstract: Capital structure decision is an important decision in corporate finance. Modigliani and Miller propounded the theory of capital structure irrelevance in their ground-breaking paper in 1958. Later, they reviewed their earlier position by incorporating the impact of tax shield of interest paid on debt. They proposed that firms should use the maximum possible amount of debt in order to maximize their value. Since then, researchers have attempted to establish the relevance of corporate capital structure and advanced several theories such as trade-off theory, pecking order theory, market timing theory and agency theory to explain the variation in capital structure across companies and across countries. Existing literature shows mixed results about the relationship between leverage and firm performance. Besides, previous studies used Ordinary Least Squares regression (OLS) method to analyse the effect of leverage on firm’s performance. The OLS approach may not capture the impact of leverage on firm performance if unobservable individual firm characteristics considerably affect the relationship. Therefore, this study uses panel data analysis to investigate the effect of leverage on the performance of pharmaceutical firms in India controlling for heterogeneity among individual firms. The results of this study indicate that financial leverage has a significant positive impact on a firm’s financial performance.
S. Aramvalarthan, M. Kannadhasan and Ashwini Babu, 2018. Capital Structure and Corporate Performance: A Study of Indian Pharmaceutical Companies. International Business Management, 12: 262-267.