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

This paper examines the impact of capital structure on corporate performance. The study is based on secondary data of sixteen listed large-sized power sector companies forming part of the BSEPOWER index as identified from the Capitaline database for the period 2006-2017. The corporate performance is proxied using two accounting measures viz. return on asset (ROA) and return on equity (ROE). Leverage is taken as the independent variable which is measured not only by the overall debt-equity ratio but also long-term and short-term debt ratios. The square of 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 on ROA is negative. 'Size' shows a significant negative effect in all cases in contrast to positive effect in few cases only. Liquidity and operating expense ratio do not have a significant influence on corporate performance. [ABSTRACT FROM AUTHOR]