Determining an optimal capital structure and its impact on financial performance. Insight from the firms listed on the New York Stock Exchange

An efficient capital structure is crucial for balancing risk and return, enhancing financial stability, and maximizing profitability. Although prior studies have explored the link between capital structure and firm performance, the effects of specific optimal configurations—such as 70% debt–30% equity, 61.8% debt–38.2% equity, and 50% debt–50% equity—remain underexamined. Guided by the trade-off theory, this study investigates how these capital structure scenarios influence financial performance among 750 non-financial firms listed on the New York Stock Exchange across 17 sectors from 2003 to 2020. Data sourced from Thomson Reuters Eikon DataStream were analyzed using random effect, fixed effect, and two-step Generalized Method of Moments (GMM) estimation techniques to ensure robustness and control for endogeneity. The findings indicate that equity financing levels of 30%, 38.2%, and 50% significantly improve return on assets (ROA) but reduce return on equity (ROE). Conversely, debt financing at 70%, 61.8%, and 50% exerts a positive influence on both ROA and ROE. These results refine traditional trade-off theory by identifying practical debt–equity proportions that enhance performance. The study offers financial managers, executives, and investors evidence-based insights to optimize financing strategies, strengthen profitability, and create sustainable shareholder value.