Nonlinear Debt Burden and Return on Capital Across Corporate Life Cycles and Institutional Regimes

Abstract

This study examines the relationship between return on capital and corporate debt burden across corporate life-cycle stages and institutional regimes. The analysis uses an unbalanced global sample of 330,875 firm-year observations from 28,804 firms in 134 economies between 2000 and 2022, and includes high-dimensional fixed effects, dynamic lag specifications, and instrumental-variable robustness tests. The evidence indicates debt can enhance capital productivity when it serves to discipline managerial slack and to finance productive growth, but excessive debt brings debt overhang, liquidity pressure and operating fragility. The findings also suggest that sustainable debt capacity varies across life-cycle stages and that it is limited in emerging-market settings. The study contributes to the capital structure literature by combining trade-off theory, debt overhang, corporate life-cycle theory, and institutional finance into a unified debt-return framework, with implications for the design of covenants, corporate treasury policy, and macroprudential supervision.