Does Leverage-Performance Vary with Firm Size? Evidence from India

Abstract

Purpose: This study evaluates if the relationship between leverage and firm performance is impacted by firm size with a sample of 900 listed non-financial Indian firms over the ten-year period, 2010 to 2019. Approach/Methodology/Design: Threshold panel regression method developed for non-dynamic panels with individual effects is applied. The advantage of this approach is that the number of thresholds and their location is determined endogenously. Findings: The study finds that firm size affects the relationship between leverage and firm performance. A single threshold level of firm size is found to split the sample into two, small firms with total assets of INR 1461.167 million or less and large firms with total assets of over INR 1461.167 million. Leverage is found to diminish firm performance for both small firms and large firms. But the negative impact is less severe on large firms though they employ higher level of leverage and more funds from short-term sources. Practical Implications: The study offers empirical findings to understand the relationship between leverage and firm performance in the context of an emerging market with less developed bond market. Both large and small firms are found to rely heavily on short-term funds. Leverage is found to have a negative association with firm performance for all firm sizes. But small firms that employ less leverage with a lower proportion of funds from short-term sources suffer a higher reduction in performance for leverage increases. The findings of this research call for immediate development of corporate bond market which can be easily accessed by firms of all sizes in order to avert the negative effect of expensive leverage on the growth and performance of these Indian firms. Originality/value: The study is an important contribution to the evolving literature that analyses if leverage-performance varies with firm size applying threshold panel regression method.