Influence of Financial Performance and Leverage on Growth of the firm with reference to Selected Manufacturing Sectors India

Abstract

The current study is examining the relationship between leverage and performance on growth of the firm with reference to Selected manufacturing sectors India Study investigates the effect of three types of the degree of leverage, degree of operating leverage, degree of financial leverage and the degree of combined leverage on the financial performance of the firms Manufacturing sector. The sample of the study includes 20 listed companies for the time period 2013-2020. Some of the companies have been excluded because the data was not available for this study period. The statistical tests that were used in this study includes: descriptive statistics, correlation analysis, unit root test and random effect regression model. Firm’s financial performance measured by the EVA (economic value added) is significantly and inversely affected by the DOL (degree of operating leverage) and DFL (degree of financial leverage). Performance measured by Tobin’s q is not significantly affected by DOL (degree of financial leverage), DFL (degree of operating leverage) and DCL (degree of combined leverage). Firm’s size has significant negative impact on the performance measured by Tobin’s Q. The results of this study support to the pecking order theory of capital structure because firm’s performance measured in term of economic value added is significantly and negatively affected by the leverage. The study recommends that stakeholders of the banking industry must be concerned with the utilization of debts effectively and efficiently to enhance an optimal leverage ratio from the findings of the study it recommended that the managers of firms should control the fixed cost to avoid the operating leverage and focus to increase the revenue of firms.