Do technology firms effectively employ optimal capital structures to maximize shareholders’ wealth? : an empirical study

Abstract

Various capital structure theories argue that markets penalize heavily geared companies. Others propose that the level of debt is irrelevant to enterprise value. This paper utilizes a balanced panel regression to test three hypotheses, which examine the relationship between capital structure and shareholders’ wealth for technology firms that constitute the S&P 500 index. We find that capital structure has a significant impact on a firm’s ability to maximize the wealth of its shareholders. A Parsimonious regression model identifies capital structure as an important predictor of shareholders’ wealth. Our final results are also highly statistically significant after controlling for most of the variables found to affect leverage in the corporate finance literature. Furthermore, we also provide and rule out alternative explanations for our outcomes.