Capital Structure, Firm Performance and Risk Exposure: New Evidence from OECD Countries

Abstract

Optimal capital structure is a key tool to take advantage of the trade-off
between firm performance and risk. Based on this, we examine how optimal
capital structure influences corporate performance and risk exposure.
We use a strong-balanced panel of 3,344 firm-year observations from 10
different OECDcountries for 2006–2016. Results reveal that firms having
short-term debt normally experience high accounting-based performance
while lowering market-based performance, firms using long-term and total
debt are largely exposed to decreased accounting and market-based performance.
The higher the long-term and total debt, the greater the chances
that firms become vulnerable to insolvency risk. Findings are robust across
alternative indicators of capital structure, firm performance and risk, alternative
model development and the two-step system GMM estimator to
control endogeneity issues. This research will be of importance to firm
managers and policymakers in designing an appropriate capital structure
for maximizing firm performance while minimizing debt-taking risks.