Investigation of the Effects of Financial and Operating Leverage on the Value of the Firm and Its Implications for Risk and Return

Abstract

India's economic growth depends on the performance of interplay between corporate earnings, financial leverage and stock market and the leading firms exhibit distinct financial strategies influencing their market valuation. The study analyzes how profitability and debt structures impact stock prices and investor returns. This study examines the relationship between corporate earnings, financial leverage and stock market performance for the top five Nifty50 companies by market capitalization from 2015 to 2023. The selected firms are Reliance Industries Limited, Housing Development Finance Corporation Bank, Tata Consultancy Services, Infosys and Industrial Credit and Investment Corporation of India Bank, represent key sectors of the Indian economy, including finance, information technology, oil and conglomerates. Using secondary data on net profits, debt-to-equity ratios and year-end stock prices, the research employs descriptive and inferential statistical techniques, including regression analysis, to assess how corporate earnings and leverage influence stock prices and returns. The findings reveal distinct sectoral trends in Reliance Industries Limited and Industrial Credit and Investment Corporation of India Bank that exhibited higher financial leverage due to capital-intensive operations, while Tata Consultancy Services and Infosys maintained minimal debt reliance. Despite these differences, all companies demonstrated consistent earnings growth, with Reliance Industries Limited, leading at a 212% profit increase over the study period. Stock prices surged across the board, with TCS reaching ₹4,000 by 2023, reflecting strong investor confidence.  The study highlights sector-specific financial strategies and underscores the dominance of earnings in banking and conglomerate valuations, while information technology stocks remain influenced by broader market trends. These insights are critical for investors and policymakers in understanding the financial dynamics of India’s leading firms.