This study examines the impact of capital structure on firm performance using a large sample of 17,284 non-financial Indian firms spanning the period from 2009 to 2023. Drawing on trade-off, agency, and pecking-order frameworks, we apply static (OLS, FE/RE) and dynamic (system GMM) panel regressions to address firm heterogeneity, persistence, and endogeneity. Performance is measured by Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q; leverage is captured via the debt-to-equity ratio. Our empirical findings reveal a statistically significant inverted U-shaped relationship: moderate leverage enhances performance through tax shields and managerial discipline, whereas excessive borrowing erodes value through distress and agency costs. System GMM results confirm robustness to endogeneity and lagged dependence. These results align with recent evidence from emerging markets that emphasise institutional constraints, information asymmetry, and governance quality as moderators of the financing–performance link (Nguyen et al., 2025; Ahmed, 2023). By providing context-specific and methodologically rigorous evidence from India—an economy undergoing structural financial reforms—this study extends capital structure theory beyond developed-market settings and identifies an optimal leverage threshold relevant for practice. Implications span corporate financing policy, investor risk assessment, and regulatory frameworks in emerging economies.

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Keywords

Capital structure, leverage, firm performance, emerging markets, India, debt-equity ratio, non-linear relationship, agency costs, tax shield