Zihan Chen

Project Description:

Capital structure, defined as the mix of debt and equity financing, has remained a cornerstone of corporate finance since the development of Modigliani and Miller’s theory. Research has shown that a company’s debt structure has a significant impact on its performance. When debt is managed effectively, the growth potential of the company is enhanced. Because the primary goal of a company is to maximize shareholder wealth and optimize its capital structure, both managers and shareholders place substantial importance on how debt is structured. Existing theories such as agency theory, tradeoff theory, and market timing theory emphasize the role of debt in corporate finance; however, the current literature does not fully address all dimensions of the topic or bridge the gap between theoretical discussions and different economic conditions. Previous studies have examined the advantages and disadvantages of long term and short term debt financing, highlighting how debt duration and risk influence firm performance. Much of this research, however, has focused on stable economic conditions or periods of financial crisis. Recent evidence suggests that firms often take on excessive leverage during economic booms, which increases the risk of instability during downturns. This study addresses that gap by examining how debt maturity interacts with periods of economic exuberance to affect firm performance, with a focus on nonfinancial U.S. firms from 1970 to 2024 to account for sector specific dynamics.

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