Capital Structure Decisions and Firm Performance: Empirical Evidence from Listed Companies in Emerging Markets

Abstract

This empirical study investigates the relationship between capital structure decisions and firm performance among publicly listed companies in emerging market economies, with evidence drawn from India, Brazil, and South Africa. Using a panel dataset of 360 listed firms over a ten-year period (2014 to 2023), the study employs fixed-effects regression and structural equation modeling to examine how debt-equity financing choices influence return on assets (ROA), return on equity (ROE), and Tobin's Q. Survey data collected from 180 Chief Financial Officers (CFOs) complemented the archival analysis by capturing managerial motivations underlying financing decisions. Findings reveal that leverage has a significant negative effect on ROA (beta = -0.34, p < 0.001) but a nuanced positive effect on Tobin's Q at moderate debt levels, consistent with the trade-off theory. Firm size, asset tangibility, and profitability are identified as significant determinants of capital structure. The study contributes empirical evidence to the capital structure debate in emerging market contexts and offers actionable guidance for corporate financial managers and market regulators.