Finance and Credit

Interrelation of company capital structure and effectiveness in Russia

Vol. 23, Iss. 48, DECEMBER 2017

Received: 31 October 2017

Received in revised form: 14 November 2017

Accepted: 28 November 2017

Available online: 22 December 2017

Subject Heading: THEORY OF FINANCE

JEL Classification: G32

Pages: 2872–2887

Fedorova E.A. Financial University under Government of Russian Federation, Moscow, Russian Federation

Rybalkin P.I. Higher School of Economics, Moscow, Russian Federation

Fedorov F.Yu. OOO RedSys, Moscow, Russian Federation

Subject The article investigates interrelations between capital structure and effectiveness of 451 Russian manufacturing companies from 2008 to 2015.
Objectives The purpose of the study is to explore the interaction between the capital structure of the companies and their effectiveness in the Russian market.
Methods Annual financials of Russian manufacturing companies from Ruslana database serve as input data. We estimate the companies' effectiveness by building non-parametric DEA models (VRS and FDH modifications). To challenge the main hypotheses, we constructed two linear regression equations under three methods, namely, OLS, 2SLS, and quantile regression.
Results Using the obtained estimates of effectiveness, we tested the agency-cost hypothesis to find out whether an additional debt leads to an increase in company performance in the next period (Jensen & Meckling, 1976). Also, there have been tested two competing efficiency risk and franchise value hypotheses to understand whether more effective companies raise additional debts to achieve their capital structure optimum or they tend to maintain positive cash flow for equity holders and avoid additional debts. Based on the findings, we rejected the agency-cost hypothesis. The effectiveness of Russian companies is not improved if the debt level grows. For a number of companies, the franchise value hypothesis was confirmed – if the major shareholder possesses from over seventy percent of the total share capital, it results in the biggest decline in the debt level in the next period.
Conclusions Raising new debt by more effective companies has an insignificant impact on their performance in the subsequent period.

Keywords: capital structure, company effectiveness, financing decisions


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