Impact of Capital Structure on The Performance of Non-Financial Firms in Emerging Markets: Evidence from The Bombay Stock Exchange Using GMM Estimation

Abstract

This study investigates the effect of capital structure on the performance of 289 non-financial firms listed on the Bombay Stock Exchange (BSE) from 2018 to 2023. Capital structure, defined as the mix of debt and equity, significantly influences firm value. Unlike earlier studies focusing mainly on ROA or ROE, this research includes net profit and gross profit margins. Using the two-step Generalized Method of Moments (GMM) to address endogeneity, the study incorporates Modigliani and Miller’s theory, agency theory, and the pecking order theory. Results show a negative relationship between long-term debt and firm performance. Firm size positively impacts efficiency, while a higher dividend payout negatively correlates with ROE. Sales growth enhances firm performance, and asset tangibility negatively affects efficiency. The study is limited by its regional scope and five-year period, suggesting future research should include more countries and extended timeframes for broader insights.