The relationship between Capital Structure and Firm Performance: Empirical Evidence from Indian Service Sector

Abstract

The main objective of this paper is to empirically investigate the effect of capital structure on firms' performance in Indian service sector. The study sample consists of 379 companies belonging to five industries under the service sector, for the period from 2010/2011 to 2016/2017. Findings reveal that short-term debt to total assets and long-term debt to total assets have a negative and significant association with firms' performance measured by return on assets (ROA), return on capital employed (ROCE) and earnings per share (EPS). The methodological issues associated with a short period of samples in the previous literature motivated the researcher to use panel data in order to resolve this issue. It is found that the existing research used traditional regression models, which provided a mixed association between capital structure choice and companies' financial performance. Therefore, the study contributes to the body of knowledge by investigating the capital structure of companies under the service sector and making a comparative analysis between the industries under the service sector.