The Impact of Financial Leverage on Company Performance: A Panel Data Analysis of NSE Firms

This study finds that financial leverage, particularly long-term debt, has a significant negative impact on firm performance in the Indian context. Short-term debt shows a less severe effect. The results also highlight the importance of firm-specific variables like size and tangibility  in  influencing  the  leverage-performance relationship. Based on the Hausman test and econometric outputs, the fixed effects model was chosen to account for unobserved heterogeneity. Financial managers should optimize debt levels to avoid performance risk, especially under changing economic conditions. This study set out to examine the impact of financial leverage on firm performance using panel data from 20 non-financial companies listed on the National Stock Exchange (NSE) of India over a ten-year period (2017–2026). By employing a fixed effects regression model and controlling for firm-specific and macroeconomic variables, the analysis provides robust insights into how different forms of debt—total, long-term, and short-term—affect profitability, measured by Return on Equity (ROE). The findings reveal that financial leverage, particularly long-term debt, has a statistically significant and negative impact on firm performance. This supports the agency cost theory, which suggests that excessive debt increases financial risk and managerial constraints, ultimately reducing shareholder returns. Short-term debt, while also negatively associated with ROE, shows a less severe effect, indicating that it may be more manageable or strategically useful in certain contexts. The study also highlights the importance of firm-specific characteristics in moderating the leverage-performance relationship. Firm size positively influences ROE up to a point, beyond which the benefits diminish, suggesting that very large firms may face operational inefficiencies. Firm age contributes positively to performance, but older firms may experience stagnation, as indicated by the negative coefficient for age squared. Tangibility plays a supportive role, especially for small firms, by enhancing access to secured financing.

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