Effect of Leverage and Adjustment Costs on Corporate Performance

The leverage ratio of Indian companies has increased significantly due to easy availability of various means of finance in the globalization period. In this context, our purpose is to find out the impact of leverage and adjustment costs on performance of the companies. The dynamic panel data model is estimated by Generalized Method of Moments (GMM) method that yield consistent parameter estimates. We have found that the adjustment speed of the various corporate performance measures has been varied between 24-58 percent and leverage has the negative impact on performance. Other control variables like size of the firm, tangibility, short-term liabilities and time dummy have also significant impact on various corporate performance measures. The paper has practical implications for managers, investors and policy makers to take cost effective financing and investment decisions in the rising interest rate regime, and developing the collateralized borrowing market in India.