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

Optimal capital structure is a key tool for taking advantage of the trade-off between firm performance and risk. Based on this premise, this study examines how optimal capital structure influences corporate performance and risk exposure. The analysis uses a strongly balanced panel dataset of 3,344 firm-year observations from ten OECD countries covering the period 2006–2016. The results reveal that firms with short-term debt generally experience higher accounting-based performance while showing lower market-based performance. In contrast, firms using long-term and total debt are largely exposed to decreased accounting- and market-based performance. Furthermore, higher levels of long-term and total debt increase the likelihood of firms becoming vulnerable to insolvency risk. The findings remain robust across alternative indicators of capital structure, firm performance, and risk, as well as alternative model specifications and the two-step system GMM estimator used to address endogeneity issues. This research provides important insights for firm managers and policymakers in designing appropriate capital structures to maximize firm performance while minimizing debt-related risks.