Validation of Capital Structure Models in the Light of Trade-Off Theory Using the Example of S&P 500 Companies

Abstract

The aim of this study is to empirically analyze the factors influencing the capital structure of companies listed in the S&P 500 Index. The existence of relationships is analyzed through the lens of trade-off theory, which takes into account financial risk. Capital structure plays a key role in a company's operations, influencing its market value, economic performance, and investment profitability. The choice of the proportion between equity and debt capital is a crucial element of financial policy, determining operational flexibility and the level of financial risk.

The study is based on extended data analysis, comparing the assumptions of Oktavina et al.'s article [Oktavina, Manalu, Yuniarti, 2018, pp. 73-82] covering the years 2012-2016 with the results obtained for a longer period encompassing recent years and periods of greater turbulence in financial markets. The paper consists of five sections, which discuss theoretical models of capital structure, corporate risk, financial ratio analysis, linear regression to determine the determinants of the Debt to Equity Ratio (DER), and a summary of the results. The study's findings allow for a clear assessment of the lack of generalizability of previous findings and even point to methodological errors committed by the authors of the cited article. The conclusions, which indicate the lack of universal regularities in shaping corporate capital structure, taking into account the adopted range of variables, constitute the study's primary added value. They also motivate further analysis in this area and outline potential directions for future research.