Debt Financing and Financial Performance: Empirical Evidence of Indian SMEs Listed in BSE-SME Platform

Abstract

The main emphasis of this research is to empirically study the impact of debt financing on the firm performance of SMEs in India. Panel data analysis is applied to study the association among debt and SMEs firm performance using three financial measures: return on assets (ROA), return on equity (ROE), and gross profit margin (GPM). The sample includes 164 non-financial Indian small and medium enterprises listed in the Bombay stock exchange—Small and medium enterprises (BSE-SME) platform from 2014 to 2018. The results of the study demonstrate that capital structure, especially short-term and long-term debt, has an adverse effect on the efficiency of small and medium enterprises. The study reveals that decisions on capital structures have little impact on SMEs’ financial results. The analysis also proves that the pecking order theory relates to small-and medium-sized enterprises in India. This is the primary research that explores the connection between debt financing and the financial results of Indian SMEs listed on the BSE-SME platform.