Impact of Capital Structure on Financial Performance - Evidence from Select BSE Sensex Companies During Pre and Post IND as Adoption Period

Abstract

Capital structure decision is one of the most important decisions in the field of financial management which involves assessment about the choice of combination of different sources of funds. These sources of funds include short term debt, long term debt, preferred stock and common stock or equity stock financing and the decision about the perfect mixture of these sources is a difficult task for the financial manager in every business firm. The perfect or ideal mixture is that where the risk and costs are minimum at the same time profits and shareholders’ wealth are maximum. Capital structure decision is a continuous process and becomes optimal when it maximizes the market value of the firm involved. Therefore, the continuous process of capital structure decisions involves an attempt to strike a balance between risks and returns in firm’s operation. Managing of optimal capital structure is of paramount importance as it would affect the profitability and ultimately the value of the firm. However, what constitutes an optimal capital structure is still a unsolved question. Despite the fact that there are many theories which tried to explain the optimal capital structure, researchers in finance have never yet find a model to determine the optimal capital structure