Abstract
This study investigates the relationship between capital structure and financial performance. The analysis is performed on a large cross-sectional dataset of firms operating in Africa, Middle East, Asia, Eastern Europe, Russia and China. Employing the Ordinary Least Squares technique, our findings provide evidence that capital structure matters for firm’s financial performance. Leverage is negatively and significantly related to returns, and positively related to systematic risk. Overall, the findings support the static trade-off theory of capital structure; there is an optimal level of debt to equity ratio, above which the marginal benefit of financing capital with debt starts decreasing.
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