Do Capital Structure and Profitability Influence Firm Value? Empirical Evidence from Indian Pharmaceutical Companies

Abstract

In the Indian pharmaceutical industry, decisions regarding capital structure and profitability play a crucial role in maximizing firm value, emphasizing the ongoing importance of studies in this field. Hence, the study investigates how capital structure and profitability influence firm value. The sample includes 16 Pharmaceutical Companies from the Nifty Pharma Index covering six years from 2018 to 2023. LDER, LDA, and TDTA represent capital structure. Profitability is measured through ROE and ROA. PBV is used to assess firm value. Firm size and tangibility serve as control variables. The results of panel regression indicate that capital structure significantly and positively impacts firm value, as evidenced by the significant positive effect of the LDER on PBV. The results also indicate that increased profitability leads to higher firm value, with ROE demonstrating a statistically significant positive influence on PBV. While firm size exhibits a positive impact on firm value, tangibility insignificantly affects firm value. The results imply that Indian pharmaceutical companies should prefer debt in their capital structure, prioritizing long-term debt over equity to meet their capital needs, and enhancing profitability through improved ROE is a critical factor in increasing firm value.