Leverage and corporate performance – the moderating role of corporate governance

Purpose Drawing on agency theory, this study sheds light on the moderating impact of corporate governance (CG) mechanism on the leverage and performance nexus in the context of Indian firms. Design/methodology/approach The analysis is carried out on Business Today-500 companies over a period of 10 years from 2008–09 to 2017–18. Fixed Effect Panel Regression is applied to analyze the data. Further, in order to deal with the issue of endogeneity, system GMM is employed. Findings Results indicate that corporate governance strengthens the relationship between leverage and firm performance. Thus, it can be inferred that leverage adversely affects firm performance; however, with the introduction of sound CG systems, the impact of leverage on performance becomes positive. Originality/value The current study enriches the existing body of knowledge by computing CG index that represents the prevailing CG system in a company holistically and gauges its impact on the association between leverage and performance. To the best of our knowledge, the present work is an unprecedented one with respect to India.