Impact of Capital Structure on Financial Performance: A Study of Select Automobile Companies in India

Abstract

There exists a debate as to whether capital structure variables and financial performance are associated or not. This study aims to understand the movement of shareholders return in the context of capital structure composition. With fifteen years data and sixteen automobile companies, both pooled regression and panel regression (Fixed effects and Random effects models) have been used and the best fitted model have been selected through Hausman test and Wald Test. The best fitted model was found to be the Fixed Effects model and according to that equity and short-term debt affects return on equity (ROE) positively and negatively respectively and both are highly statistically significant. The model explained almost 57% variation in ROE with no autocorrelation problem in error term. The study is of high significance to the investors as well as firms for decision making as the study reveals ROE is fairly explained by Capital Structure composition.