Debt Equity Mix & Financial Performance: Evidence from Indian IT Sector

Abstract

Business organizations across the world employs a combination of debt and equity to fund its operations. It represents capital structure of a firm which is also known as financial leverage. According to various pre-established theories, it plays a predominant role in its profitability. The current study investigates the effect of debt equity mix on the financial performance of the selected companies. Sample of 44 companies listed on the S&P BSE Information Technology Index has been taken to analyze the influence of the capital composition on its profitability results. Ten years data from 2010 to 2019 have been captured to analyze the objective. Three accounting-based ratios have been used as measures of financial performance i.e. Return on Asset (ROA), Return on Equity (ROE), and Earnings per Share (EPS). Debt equity mix, size and age of the company along with growth in sales are used as independent variables. Panel data analysis was applied to estimate the effect of debt equity mix on financial conduct of the selected firms. Hausman test was conducted to choose the best fit between fixed effect and random effect on panel data regression. The empirical results demonstrate that the debt equity mix does not have a significant effect on ROA and ROE. However, it has a notable effect on and a strong positive correlation with EPS and ROA of companies. It was also found that size of the company has a significant correlation with EPS but it does not have a notable effect on its ROE. It was also observed that age of the company have no significant effect on its ROA, ROE and EPS. Growth in sales has a significant association with ROA and EPS but it does not impact the ROE significantly.