Leverage and performance: Do size and crisis matter?

Purpose: This paper aims to contribute to the capital structure literature by examining the impact of financial leverage on firm performance and also the extent to which firm size and crisis matter in the leverage–performance relationship.

Design/method/approach: Using data from 2403 Indian firms during the period 1995–2014, generating a total of 19,544 firm-year observations, panel econometric methods are employed to test the leverage-performance relationship.

Findings: Drawing insights from agency theory and using Tobin’s Q (TQ) as our main measure of performance, we uncover that financial leverage is negatively and significantly related to firm performance. We also observe that the impact of financial leverage on firm performance is lower for smaller firms than larger ones. Finally, we show that the 2007/08 financial crisis had no significant impact on the relationship between financial leverage and firm performance.

Originality/value: The paper provides fresh evidence on the impact of leverage on performance, particularly from the context of India. This study is also among the first studies to examine the role of firm size and financial crisis in the leverage-performance relationship.