The optimal capital structures to maximize shareholders’ wealth

Abstract

This paper uses regression and financial metric analysis to test the relationship between capital structures and shareholders’ wealth for European public firms, namely the constituents of the Euro Stoxx 50. The regression analysis utilises panel data to test two hypotheses. The results of the regression analysis show that leverage has a negative relationship with shareholders’ wealth. Various other statistically significant variables that influence shareholders’ wealth were identified and these were important in explaining shareholders’ wealth. In addition, the financial metric analysis further affirms that the cost of capital and the capital structure decision have a significant impact on the overall value of shareholders’ wealth.