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Moderating effect of the capital structure on the idiosyncratic risk and market performance of listed firms

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  • Leandro de Lima, Samuel Lyncon
  • da Silva, Tarcísio Pedro
  • da Rocha Armada, Manuel José

Abstract

The corporate capital structure is one of the pillars that ensure the sustainability of companies. Despite efforts of researchers for explaining the capital structure choice, there are gaps in relation to why managers do not take enough actions for optimal corporate capital structure, and also what limits managers from taking enough actions for the same matter. In order to provide more empirical evidence to explain those issues, we investigated the moderating effects of the corporate capital structure on the relationship between idiosyncratic risk and return. From the Refinitiv Eikon database, we investigated European Union, Latin American, and North American listed companies, from 2002 to 2021. Since we evaluated the moderating effect of the corporate capital structure on the relationship between expected risk and return, our results contributed to explaining the dimension of debt adjustment. In fact, we found positive effects, of the corporate capital structure, on the relationship between idiosyncratic risk and market performance of those companies, as well as other effects of the corporate capital structure on the market performance of listed companies. Thus, our main contribution was to provide (also) empirical support to explain how the capital structure increases the idiosyncratic risk of companies when the manager increases leverage. In addition, we found that the compensation for the added idiosyncratic risk is a task that managers seem to understand, because variations in the capital structure had a positive effect on variations in the market performance of companies.

Suggested Citation

  • Leandro de Lima, Samuel Lyncon & da Silva, Tarcísio Pedro & da Rocha Armada, Manuel José, 2025. "Moderating effect of the capital structure on the idiosyncratic risk and market performance of listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25001696
    DOI: 10.1016/j.pacfin.2025.102832
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