Jul 2026· Journal of finance issues· 0 citations· 28 references
Abstract
We examine the determinants of capital structure for S&P 500 firms over the recent 25 years from 2000 to 2024. Using both traditional regression models and machine-learning approaches, we investigate how firm fundamentals and macroeconomic conditions jointly shape firms’ leverage decisions. Across several empirical methods, including OLS, Lasso, Ridge, Random Forest, and Gradient Boosting, we find that operating profitability, tax-shield benefits, and earnings volatility consistently emerge as the most important determinants of leverage. Firms with higher profitability rely less on external financing, while tax incentives or greater internal cash flow uncertainty can result in the use of more debt. Nonlinear models further highlight liquidity as an important predictor, suggesting that internal cashflow buffers reduce reliance on external financing. At the macro level, GDP growth is negatively associated with leverage, consistent with firms deleveraging during economic expansions. Overall, our findings suggest that firm-specific characteristics play a dominant role in shaping capital structure decisions, while macroeconomic conditions exert a secondary but meaningful influence.
Capital structure research began with a deceptively simple question: does the division of financing between debt and equity change firm value? The literature gradually widened that question by adding taxes, bankruptcy costs, agency conflicts, private information, market timing, adjustment costs, national institutions, managerial traits, debt design, and intangible capital. This narrative review examines how those additions changed both theory and practice. It draws on influential foundational papers and selected empirical studies from developed and emerging economies. The evidence does not identify one theory that explains every firm or period. Instead, leverage reflects several forces whose importance varies with cash-flow stability, assets, investment opportunities, access to lenders, institutional conditions, and managerial judgment. Recent work places particular emphasis on maturity, covenants, refinancing risk, unused borrowing capacity, and the ability to finance future investment. The review concludes that capital structure has shifted from a largely static search for one optimal debt ratio toward an adaptive financing policy. Classical theories remain useful, but their insights are now applied within a broader concern for resilience and financial flexibility.
Hasnat Karim· International Journal of Adv...· 0 citations
This research examines the effect of capital structure and profitability on firm value, with liquidity as a moderating variable, among food and beverage (F&B) manufacturing companies listed on the Indonesia Stock Exchange during the 2020–2024 period. The research is motivated by inconsistent findings in previous studies and the unique financial conditions faced by the F&B sector following the COVID-19 pandemic, including supply chain disruptions, inflationary pressures, and changing consumer behavior. A quantitative approach was employed using secondary data from annual reports, 208 panel observations were analyzed through panel data regression and Moderated Regression Analysis (MRA), with model selection via Chow, Hausman, and Lagrange Multiplier tests. The findings reveal that capital structure has a significant negative effect on firm value, indicating that excessive leverage reduces market valuation. Profitability also demonstrates a significant negative effect on firm value, reflecting investor concerns regarding earnings sustainability during post-pandemic recovery. Liquidity has a significant negative direct effect on firm value, suggesting that excessive current assets may be perceived as inefficient resource utilization. However, liquidity significantly strengthens the relationship between capital structure and firm value, as well as between profitability and firm value, confirming its strategic moderating role in translating financial decisions into market value. This study contributes to corporate finance literature by providing empirical evidence on the moderating role of liquidity in the Indonesian F&B industry during the post-pandemic period and offers practical implications for managers and investors in optimizing financial policies.
Unknown authors· Jurnal Indonesia Sosial Sain...· 0 citations
This study examines the moderating role of liquidity in the relationship between extreme capital structure and firm performance among listed firms in emerging markets. It is motivated by the need to better understand how financing constraints and liquidity management influence firm performance in environments characterised by high financial frictions and limited access to external capital. Extreme capital structure is defined as firms maintaining very low levels of debt, measured using thresholds of 1% (ultra-low debt) and 5% for both long-term debt and total debt. The analysis is based on a panel dataset of non-financial listed firms over the period 2006–2024 and employs a dynamic panel System Generalised Method of Moments (System GMM) complemented by a Random Effects model for robustness. Empirical results indicate that liquidity has a meaningful and predominantly positive moderating effect. This is observed when firms maintain extremely low long-term debt (1% threshold) and low long-term debt (5% threshold). Liquidity enhances firm performance. This effect is strongest for return on assets (ROA) and return on equity (ROE). The effect on Tobin’s Q is weaker but remains generally positive. These findings highlight the strategic importance of liquidity in improving profitability and financial resilience under conservative financing structures. However, the findings are limited to listed non-financial firms in emerging markets and may not be generalizable to SMEs or unlisted firms. Future research could explore the threshold at which liquidity ceases to generate benefits or begins to produce diminishing returns in ultra-low leverage contexts.
Owen Ncube, G. Marozva· International Journal of Fin...· 0 citations
This study investigates how capital expenditure (CAPEX) intensity and leverage jointly relate to performance and risk in publicly listed U.S. hotel and restaurant firms. Using panel data for 67 corporations (23 hotels, 44 restaurants) from 2013 to 2023, the analysis models lagged CAPEX intensity and leverage alongside firm size, sales growth, and operating cash flow in firm-level regressions and portfolio-level time-series analyses. The sample consists predominantly (78%) of asset-heavy property owners rather than asset-light franchisors, with important implications for interpretation. Results reveal that higher CAPEX intensity is positively associated with subsequent accounting performance (return on assets, earnings before interest and taxes [EBIT]/total assets, liquidity ratios, and market-to-book), with associations substantially stronger for asset-heavy hotel corporations than restaurant corporations or asset-light franchisors. Leverage exhibits a negative relationship with accounting performance, particularly pronounced in the capital-intensive asset-heavy hotel sector. Portfolio-level autoregressive models demonstrate strong persistence in operating performance, indicating that firms sustaining higher investment intensity tend to remain in favorable performance regimes across years. Simultaneously, Generalized Autoregressive Conditional Heteroskedasticity models reveal pronounced and persistent volatility clustering in risk-adjusted equity returns, suggesting that intensive CAPEX programs are accompanied by extended periods of heightened uncertainty for investors. The findings underscore fundamental tensions in hospitality finance: while sustained investment is associated with long-term value creation, it must be balanced against leverage constraints and managed investor expectations around short-term volatility during turbulent periods such as the COVID-19 shock. These results should be interpreted as conditional associations rather than causal effects, given inherent endogeneity concerns in observational investment data.
This study investigates the relationship between financial leverage and firm performance and examines the moderating role of macroeconomic conditions among GCC-listed firms. While prior studies have primarily focused on the direct effect of leverage on firm performance, comparatively limited attention has been devoted to understanding how macroeconomic conditions shape the relationship between financial leverage and firm performance in emerging markets. Drawing on Trade-off Theory, Agency Theory, and Contingency Theory, this study argues that the effectiveness of financial leverage depends on prevailing macroeconomic conditions. Using a panel of GCC-listed firms over the period 2016–2023, the analysis employs a dynamic two-step System Generalized Method of Moments (System GMM) estimator to address endogeneity, unobserved firm heterogeneity, and the persistence of firm performance. Firm performance is measured using return on assets (ROA), return on equity (ROE), and Tobin’s Q. The baseline results reveal that financial leverage has a significant negative effect on both accounting-based and market-based measures of firm performance, suggesting that the costs associated with excessive debt outweigh its financing benefits. The moderation analysis further reveals that macroeconomic conditions exert heterogeneous effects on this relationship. Specifically, GDP growth mitigates the adverse effect of financial leverage on ROA, whereas inflation mitigates the adverse effect on ROE but reinforces the adverse effect on Tobin’s Q. These findings demonstrate that the impact of financial leverage on firm performance is contingent upon prevailing macroeconomic conditions and varies across accounting-based and market-based performance measures. The study contributes to the capital structure literature by integrating firm-level financing decisions with macroeconomic conditions and extending the explanatory power of Trade-off Theory, Agency Theory, and Contingency Theory by demonstrating how macroeconomic conditions shape the relationship between financial leverage and firm performance in the GCC context. The findings also have important implications for corporate managers, investors, and policymakers by emphasizing the need to incorporate macroeconomic conditions into capital structure decisions and adopt adaptive financing strategies to promote sustainable firm performance under changing macroeconomic conditions.
Faiza Abdalla Sheikh Batoun, Ayesha Mohamed Ali Abdulla Batoun· Journal of Risk and Financia...· 0 citations
The relationship between capital structure and firm market valuation remains a central yet unresolved question in corporate finance, with outcomes shaped critically by industry-specific asset structures and financing environments. This study investigates how capital structure influences market valuations across two structurally divergent sectors in India, the asset-light information technology (IT) industry and the asset-intensive automobile industry, using balanced panel data for 14 firms in each sector over 2005–2024. Fixed effect and random effect panel regression models are employed to isolate the direct effect of leverage on earnings per share (EPS), with model selection determined by the Hausman specification test. Complementing these estimations, the Graphical Lasso is applied to recover a sparse conditional dependence network among key financial variables, an approach particularly suited to this research question, as capital structure, profitability, tangibility, and growth are jointly determined, rendering pairwise correlations insufficient for identifying genuine financial linkages. The findings establish that debt exerts a positive and statistically significant effect on market valuations in both sectors, but through distinct economic channels: moderate leverage amplifies profitable growth signals in IT firms, while tax shield benefits drive valuation in automobile firms, constrained by asset tangibility and debt-servicing thresholds. These results support trade-off theory in the automobile sector and pecking order logic in the IT sector, underscoring that sector-specific financing strategies yield superior valuation outcomes compared to universally applied capital structure prescriptions.
Priyanka Goyal, A. Sah· Econometrics· 0 citations
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