Leveraged And Unlevered Firms Capital Structure And Stock Performance: A Systematic Literature Review

Abstract

This systematic literature review explores the relationship between capital structure and stock performance in terms of leveraged and unleveraged firms in emerging markets. Capital structure decisions involves the mix of debt financing and equity financing, which significantly impact a firm’s financial health, stock returns, and market volatility. Leverage can amplify profits during favourable conditions but also increases financial risk, particularly during economic downturns. While traditional theories such as the Modigliani-Miller theorem and trade-off theory have provided foundational insights, empirical studies suggest that the impact of leverage varies across different markets, industries, and economic conditions. In emerging markets like India, factors such as regulatory environments, market maturity, and economic challenges further shape the capital structure-stock performance relationship. Pune an important economic hub, represents a unique context for exploring this dynamic, but regional studies are sparse. This review synthesizes findings from high-quality studies on capital structure and stock performance, aiming to clarify how different capital structures affect stock performance, particularly for firms in Pune. The review highlights the dual impact of leverage, the importance of industry-specific factors, and the need for more regional studies, especially in emerging economies. It suggests that future research focus on regional variations, long-term implications of capital structure decisions, and the interplay between corporate governance, investor sentiment, and financial stability.