Similular in the bull market of 1980s, Q went up at the time of investment dropes. This empirical evidence showed that Q acted exactly the opposite of its original theory. Check out an interview with James Tobin about his model . Essentially, Modigliani and Miller states that in an efficient capital market with no tax distortions the relative proportion of debt and equity in a corporate capitalization does not affect the total market value of the firm. Ofcourse, Doug Henwood makes fun of Modigliani and Miller.
Debt does change the capital structure of the firm.
First of all, if a company has debt than it can get greater tax bracket from the government, than other unleverage firm that has equity. The U.S. corporations can deduct interest payments, but not stock dividends from their taxable income, and increase in levarage is certain to reduce a firm's tax rate. Secondly, a company that is burdened by debt has greater risk to fall into financial crisis than the one that is not. That is, in good times, high debt firms were likely to expand quickly, but in bad times, they tended to cut back just as quickly - generalization that certainly fit the U.S. economy in the 1980s and early 1990s. Firms that could most profitably use external finance seem to have the least access to it, while those firms with the least promising investment prospects are suffused with surplus cash.