Debt-Equity and Financial Performance: Evidence from the Dow Jones Industrial Average

Abstract

Capital structure decisions involve balancing debt, equity, and internal financing to minimize risk and maximize firm value, with each source having distinct advantages and limitations. Financial managers play a strategic role in optimizing this balance, guided by key theories like Modigliani–Miller, Trade-off, Pecking Order, and Agency Cost theory. This study examines the influence of capital structure on firm performance in the United States of America during the post-Global Financial Crisis period (2009-2020), covering data from 12 years, using data from the Dow Jones Industrial Average (DJIA). Employing a rigorous quantitative framework, the analysis applies standardized multiple regression techniques to evaluate the impact of leverage, proxied by the total debt-to-total equity (TDTE) ratio, on Earnings per Share (EPS) and Return on Equity (ROE). The model also incorporates a set of key control variables. The empirical findings reveal that TDTE exhibits negative but statistically insignificant coefficients for both EPS and ROE, suggesting a diminished role of debt in influencing performance during the post-crisis period. These findings suggest that structural and macroeconomic factors outweigh debt-equity composition in shaping financial performance for the index. The study contributes to the literature by highlighting the predominance of structural and macroeconomic factors over capital structure decisions in shaping firm performance.