This study evaluates whether the relationship between leverage and firm performance is impacted by firm size from a sample of 900 listed non-financial Indian firms over the ten-year period, 2010-2019. The threshold panel regression method developed for non-dynamic panels with individual effects is applied. The advantage of this approach is that the number of thresholds and their locations are endogenously determined. The study finds a non-linear relationship between leverage and firm performance which is contingent on firm size. A single threshold level of firm size is found to split the sample into two groups, small firms with total assets of INR 1461.167 million or less and large firms with total assets exceeding INR 1461.167 million. Leverage is found to diminish firm performance in case of both small and large firms. However, the negative impact is less severe on large firms although they employ a higher level of leverage and rely more on short-term sources. The study offers empirical findings to understand the relationship between leverage and firm performance in the context of an emerging market with less-developed bond market. Both large and small firms are found to rely heavily on short-term funds. Leverage is found to have a negative association with firm performance for all firm sizes. But small firms that employ less leverage with a lower proportion of funds from short-term sources suffer a higher reduction in performance for leverage increases. The findings of this research call for immediate development of corporate bond market which can be easily accessed by firms of all sizes in order to avert the negative effect of expensive leverage on the growth and performance of these Indian firms.

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