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1.1 Research Background The capital structure of an enterprise simply reflects the efficiency with which it utilizes its assets through various financing options - Debt (in the form of borrowings), equity (by issuing shares), and personal savings (for small businesses). The capital structure generally refers to the mix of equity and long-term liabilities. In general, companies with higher debt financing are considered riskier, although some analysts believe that capital structure is not critical to risk or profitability (Zeb et al., 2016). As also, liquidity plays an important role in improving business performance. Financial liquidity is the ability of an enterprise to meet immediate and short-term obligations through holding cash or a portfolio of assets that can be quickly converted or realized into cash (Daryanto et al., 2018). Its high level allows continuity of trading activities with minimal price disruption.The measurement of financial liquidity provides very helpful information to internal and external investors regarding the functioning and the level of profitability (Zygmunt, 2013). Every profit-seeking enterprise wants to generate good returns and increase its market value so that investors can recover their investment and this gives a positive signal to the market (Bhatnagar et al., 2019). Thus, the basic goal of every company is to maximize its profitability as well as employ an optimum capital structure and maintain an appropriate level of financial liquidity.Though the profitability of enterprises varies depending on the size and level of their commercial activities, profitability is the base to assess their success. Moreover, financial institutions view debt financing from a different perspective as they rely on financing from short-term and long-term debts. Financial and banking institutions have always mobilized different types of deposits into their pools from which they allocate funds for loans and financing and other income-generating assets present in their portfolios. Profitable management of these short-term and long-term debts becomes a central issue for financial institutions. However, a large body of research has focused on individual predictors of profitability, such as capital structure (Dinh& Pham, 2020), financial leverage (Afolabi, 2019; Rahman et al., 2020), organizational size (Marfuah&Nurlaela, 2019), liquidity (Rahman & Sharma, 2020), interest coverage (Gul & Cho, 2019), and so on. Taking a broader perspective, this articleattempts to analyze the impact of different explanatory variables of capital structure and financial liquidity on the various profitability measures of listed financial institutions in India, which is the central issue of current research. 1.2 Statement of the Problem The combined impact of financial liquidity and capital structure variables on organizational financial performance has always been a major concern for financial managers of enterprises in different sectors. These variables must be properly combined to improve organizational financial performance. Against this backdrop, this study attempts to identify the gray areas in the impact of these variables on the profitability of selected financial institutions.

Review of Background Theories

Trade-Off Theory

The “Trade-off theory” was originally proposed by Krauss and Litzenberger (1973) and later developed by Myers and Mazlouf (1984). The theory originally suggested that the benefits of using debt could be zero or negative when a business is so inefficient that it becomes bankrupt. Whether or not an enterprise may become bankrupt depends on the operational risks of the enterprise as well as the capital sourcing, management, operating, and utilization policies of the enterprise. Krause and Litzenberger (1973) argued that “the optimal capital structure reflects a trade-off between the tax benefits of debt and the costs of bankruptcy.”

The Pecking Order Theory

The “Pecking order theory”suggests that companies follow a priority pattern for their capital structure choices, particularly when it comes to debt financing. Myers &Majluf (1984) propounded that the "pecking order" model is based on asymmetric information, as managers have intrinsic information about the company's future prospects and act in a way that benefits existing shareholders. Thus, companies prefer internal financing (utilizing retained earnings) in contrast to external financing, and in case external financing is needed, companies prefer debt over equity. Empirical tests of this theory have yielded mixed results, and it can be argued that the hypothesis on which this theory is based appears to be highly applicable to data before 1990 than after 1990 (Ni & Yu, 2008).

Review of Empirical Research Studies

Daryanto et al. (2018) examined the effect of capital structureand liquidity on the financial performance of three listed realestate companies from Indonesia over a five-year period (2012 to 2016). The results show that the liquidity and total debt ratio are negatively correlated with the return on assets (ROA).

Gul and Cho (2019) asserted that a rise in the short-term debt-to-equity ratio leads to a higher default risk, while a rise in the long-term debt-to-equity ratio leads to a lower default risk. The study further shows that tangible assets, firm size, and interest coverage significantly determine default risk.

Afolabi et al. (2019) used econometric models and regression analysis to study the impact of financial leverage and profitability of Nigerian firms. The results indicated a significant positive impact between financial leverage (DER and TDR) and profitability, suggesting that the firms should continue to use debt financing so as to benefit from the available tax shields and ultimately increase profits.

Qayyum and Noreen (2019) conducted a study on conventional and Islamic banking institutions. The study found that ROE was positively correlated and ROA was negatively correlated with the capital structure of both kinds of banking institutions. Furthermore, the study observed that, apart from the firm size, the capital structures of both kinds of banking institutions were similar.

Dao and Ta (2020) used a meta-analysis approach to study the association between financial leverage and the financial performance of business organizations. Research asserted that financial performance was negatively related to capital decisions, favoring the agency-cost trade-off model and pecking order theory.

Rahman et al. (2020) used a sample of 22 listed textile companies in Bangladesh to analyze the effect of leverage on corporate profitability. A combination of OLS and GMM models was used to test this impact. The study uses ROE to measure corporate profitability. Both short-term and long-term debts are used as agents of financial leverage. The findings indicated a significantly negativeassociation between financial leverage ratios and corporate profitability. It recommended paying greater attention to raising funds internally to meet their own financing needs.

Theoretical Framework

The conceptual theoretical model associated with financial liquidity and capital structure to the profitability of the financial institutions is presented in Figure 1 below:

Fig.1 – Theoretical Framework for the Study

Study Variables

Based on the above conceptual theoretical model, the connotations of the study variables are clarified in Table-1 below:

Table – 1: Study Variables Defined

Study Variables	Connotations
Dependent Variables: Return on Assets (ROA) Return on Equity (ROE)	Profits before Interest & Taxation / Total Tangible Assets Profits after Taxation / Equity Net worth
Independent Variables: Current Ratio (CR) Debt-Equity Ratio (DER) Total Debt Ratio (TDR)	Current Assets / Current Liabilities Total Debts / Equity Net worth Total Debts / Total Tangible Assets

Source: Author’s own elaboration

Population, Sampling, and Sources of Data Population for the purpose of the current study consists of all financial institutions listed in Indian stock exchanges. The listed Indian banks and financial institutions constitute the sampling units.The sample comprises of the selected financial institutions - Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and State Bank of India. The study analyzes the impact of financial liquidity and capital structure on the profitability, taking data from the audited financial statements of selected financial institutions for a period of five years from 2017-18 to 2021-22.

Descriptive Analysis

The results of the descriptive analysis are depicted in the table-2 below:

Table – 2: Results of Descriptive Analysis

Variables	N	Minimum	Maximum	Mean	SD
ROA	25	0.02	7.27	5.20	2.316
ROE	25	-2.35	16.45	8.80	5.277
CR	25	12.22	27.06	18.16	2.827
DER	25	4.66	17.67	8.96	3.591
TDR	25	0.718	1.188	0.89	0.094

Source: SPSS Output

Correlation Analysis

The results of the correlation analysis are depicted in the table-3 below:

Table – 3: Results of Correlation Analysis

Variables	ROA	ROE	CR	DER	TDR
ROA	1.000
ROE	.404*	1.000
CR	.029	.114	1.000
DER	-.429*	-.457*	-.387	1.000
TDR	-.099	-.418*	-.409*	.779*	1.000

*Significant at .05 level.

Source: SPSS Output

Table-3 evidences that current ratio, the proxy of financial liquidity, shows positive correlation with profitability. However, debt-equity ratio and total debt ratio, the proxies of capital structure show negative correlation with profitability.

Regression Analysis

Table – 4: Regression Model Summary

Model	R	R2	Adj. R2	S.E. of Estimate	ANOVA
					F	Sig.
1	.723	.523	.412	.0245	4.12	.026
2	.846	.716	.561	.0517	3.93	.044

Source: SPSS Output

As evidenced by table-4, the value of adjusted R² is .412 under model-1 (ROA). This indicates that independent variables (CR, DER, and TDR) explain only 41.2% of the dependent variable (ROA). The remaining 58.8% is explained by other variables that are not depicted in the current study. Likewise, the value of adjusted R² is .561 under model-2 (ROE). This indicates that independent variables (CR, DER, and TDR) explain only 56.1% of the dependent variable (ROE). The remaining 43.9% is explained by other variables that are not depicted in the current study.

Asobserved in Daryanto et al. (2018), variance inflation factor (VIF)and tolerance value may be used to check the multi-collinearity, i.e. similarity between the independent variables. As the tolerance values are higher than .1 and VIF is lower than 10, there is no multi-collinearity in the regression models.

Table – 5: Regression Results of Model 1

[Model 1: ROA_i,n = β₀ + β₁CR_i,n + β₂DER_i,n + β₃TDR_i,n + ɛ_i,n]

Source: SPSS Output

Table – 6: Regression Results of Model 2

[Model 2: ROE_i,n = β₀ + β₁CR_i,n + β₂DER_i,n + β₃TDR_i,n + ɛ_i,n]

Source: SPSS Output

From the regression results summarized in tables 5 &  6, it can be observed that all the proxies of independent variables, CR, DER, and TDR significantly influences both the proxies of dependent variables (p<.05). Thus, both the research hypotheses H₀₁ and H₀₂ stands rejected. This indicates that capital structure and financial liquidity significantly impacts corporate profitability of listed financial institutions in India. The results of this study are in line with that of Daryanto et al. (2018); Dinh& Pham (2020); Rasheed et al. (2022); Zeb et al. (2016).

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