Golden ratio-based capital structure decisions in European and American manufacturing, trade, and service sectors

Abstract

The aim of our study is to examine the relationship between the golden ratio-based capital structure and firm-specific characteristics. To address our research questions, we apply linear mixed-effects models to analyse the relationship between firm-level determinants of leverage known from the literature and the absolute deviation of leverage from the golden ratio benchmark. Our main findings indicate that, on average, the absolute deviation of leverage from the golden ratio decreased over the period 2019--2023 in European and American manufacturing, trade, and service sectors. Although this downward trend is observable, the temporal evolution of the deviation shows substantial heterogeneity across the practices of listed firms. Larger deviations are associated with higher profitability and collateral value, while better ESG performance tends to be linked to lower absolute deviations. As a practical implication, we demonstrate that, contrary to the optimal ratios posited by static and dynamic capital structure theories, corporate financing decisions frequently give rise to self-similar proportionality in leverage. Corporate leverage does not evolve in accordance with a normative optimum; rather, it converges toward a compromise-driven behavioral equilibrium that exerts a favorable influence on both firm performance and market valuation. Due to the positive investor sentiment, a golden-ratio-based capital structure -- analogously to ESG principles -- may be associated with the perception of robust and stable corporate governance.