Structuring Success: The Impact of Capital Structure on Financial Performance of Listed Manufacturing Firms in South Asia

Abstract

This study investigates the impact of capital structure on the financial performance of manufacturing firms in South Asia from 2019 to 2023. Using a quantitative approach involving panel data regression analysis over the period 2019–2023, data from 37 publicly listed manufacturing companies were examined, offering insights into the listed segment of South Asia’s manufacturing sector. The findings reveal a statistically significant negative relationship between capital structure, measured by debt-to-equity and debt-to-asset ratios, and firm performance, as captured by Return on Equity (ROE). The study suggests that excessive debt adversely affects financial performance, emphasizing the need for an optimal capital structure to enhance firm profitability and mitigate financial risk. The results offer valuable observations for managers and investors, emphasizing the significance of capital structure in strategic decision-making and investment evaluation within emerging markets. For managers, the study highlights the importance of maintaining an optimal mix of debt and equity to enhance financial performance and reduce risks associated with high debt levels. For investors, it emphasizes the need to consider a firm's capital structure when evaluating investment opportunities, as it impacts the financial stability and performance of the organizations. This research contributes to the growing literature on capital structure in emerging markets and offers a region-specific analysis that addresses a notable gap in prior empirical studies.