Published Online:July 2025
Product Name:The IUP Journal of Accounting Research & Audit Practices
Product Type:Article
Product Code:IJARAP250725
DOI:10.71329/IUPJARAP/2025.24.3.535-561
Author Name:Utkarsh Bhattar, Kedar Lad, Abhay Kumar and Geetha Iyer
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:535-561
The paper analyzes the long-run effects of innovation and financial leverage on firm profitability, with an emphasis on the lagged effects of research and development (R&D) expenditure. Employing 15-year panel data (2010-2024) of top 500 listed Indian companies on NSE based on their market capitalization, the interaction between R&D expenditure and financial leverage in the determination of profitability return on assets (ROA) was studied. The estimation employed fixed effects (FE) and first difference ordinary least squares (FDOLS) models to control firm-level heterogeneity and dynamic relations. The results indicated that although innovation has a positive effect on profitability in the long term, high financial leverage is negatively associated with returns and is a dampening factor in long-term growth. Interestingly, the payoffs of R&D expenditure are most pronounced after a lag of 6 years, wherein the lagged R&D intensity and R&D-to-total assets have a significant positive effect on profitability. On the other hand, the debt-to-equity ratio (DER) has a negative effect, highlighting the associated risks of high leverage. These findings underscore the requirement of a long-run strategic coordination between innovation and capital structure in order to achieve optimal sustainable firm performance.
Historically, innovation has played a central role in driving company growth, competitiveness, and value creation in the long term.