25, February 2026

Capital Structure Decisions and Firm Performance: A Conceptual Review

VOLUME-12; ISSUE-2; FEB-2026

Author(s): Dr Raghuveer R

Authors Affiliations:

Faculty, MBA, Yuvarajas College (Autonomous), University of Mysore, Mysore

DOIs:10.2015/IJIRMF/202602012     |     Paper ID: IJIRMF202602012


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Capital structure decisions are among the most critical strategic financial choices faced by firms, as they influence profitability, risk, and long-term sustainability. Despite extensive research on the relationship between capital structure and firm performance, existing literature presents mixed and inconclusive findings. While some studies report positive effects of leverage on firm performance, others indicate negative or insignificant relationships, particularly across different economic and industrial contexts. This lack of consensus highlights the need for a comprehensive conceptual synthesis of existing knowledge.

The present study undertakes a secondary data–based conceptual review to examine the relationship between capital structure decisions and firm performance. Drawing upon established theories such as the Modigliani–Miller propositions, Trade-Off theory, Pecking Order theory, and Agency cost theory, the study critically reviews and integrates findings from prior empirical research conducted in both developed and emerging economies. The review focuses on commonly used capital structure indicators, including debt–equity ratio and total debt ratio, and firm performance measures such as return on assets, return on equity, earnings per share, and market-based indicators.

The findings reveal that the impact of capital structure on firm performance is context-specific and influenced by firm characteristics, industry conditions, and economic environments. The study concludes that there is no universally optimal capital structure applicable to all firms. By synthesizing theoretical perspectives and empirical evidence, this conceptual review contributes to a clearer understanding of the capital structure–firm performance relationship and offers valuable insights for managers, researchers, and policymakers.

Capital Structure; Firm Performance; Leverage; Profitability; Secondary Data Review; Conceptual Framework

Dr Raghuveer R (2026); Capital Structure Decisions and Firm Performance: A Conceptual Review, International Journal for Innovative Research in Multidisciplinary Field, ISSN(O): 2455-0620, Vol-12, Issue-2, Available on –   https://www.ijirmf.com/

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