A revisit of capital structure puzzle: Global evidence and analysis

The ongoing debate on optimal capital structure is one of the core issues of corporate finance literature since it is initially and academically presented by Modigliani and Miller (M-M theorem 1958 & 1963). Nonetheless, the existing corporate finance literature hardly provides global empirical evidence on the impact of financial leverage on firm value. To address the issue, based on cross-country panel testbed as of Dec. 2004–Dec. 2018 for high and low geared firms, the test results indicate that the overall firm performances of high geared firms are significantly lower than those of low geared firms. We document that high geared firms are financially less stable, and thus subject to lower value as compared to counterpart ones, because additional debt can cause value destruction due to bankruptcy. Interestingly, our finding is consistent across different dimensions: cross-country, cross-industry, size group, and period analysis. However, this empirical evidence is inconsistent with M-M propositions on capital structure irrelevance theory (1958; 1963). The underlying probable reason could be that M-M theory is based on the assumptions of a perfect world which makes the theory idealistic, impractical & dead in real world. Hence, by addressing a core issue of corporate finance, the study notably contributes for providing a global evidence of the impact of leverage on firm performance. Therefore, this study significantly contributes to deeply rethinking the proposition of financial gearing on firm value; and thereby to design the optimal capital structure decision for sustainable finance and responsible investments for wealth maximization.