CAPITAL STRUCTURE AND FIRM VALUE: EVIDENCE FROM THE RUSSIAN STOCK MARKET

INTRODUCTION 5
CHAPTER 1. THEORETICAL DESCRIPTION AND BACKGROUND OF CAPITAL
STRUCTURE 8
1.1. Definition and general information about firm financing and capital structure 8
1.2. Formulation of Capital Structure Problem 10
1.3. Capital Structure Determinants 13
1.4. Expanding the Understanding of Capital Structure Determinants 16
CHAPTER 2. EMPIRICAL ANALYSIS OF CAPITAL STRUCTURE IMPACT ON FIRM
PERFORMANCE 19
2.1. Research design 19
2.2. Contribution of Capital Structure Validation Mechanism 21
2.3. Data & Sources 23
2.4. Trends in Capital Structure Across Sectors 25
2.5. Sector Capital Structure Neighborhood (SCSN) Analysis 26
2.6. The Effects of Fundamentals on Cost of Debt 27
2.7. Positive Influences on YTM 27
2.8. Negative Influences on YTM 28
2.9. Analysis of Optimal Capital Structure and Realized Debt Ratios 29
2.10. Performance Based on Capital Structure Measures 31
2.11. Summary of Research Findings 34
CONCLUSION 36
REFERENCES 38
APPENDIX 41
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The cost of capital is a critical factor in company valuation as it determines the rate at which future cash flows are discounted. Financial managers play a crucial role in optimizing capital structure to maximize firm value. Among theories that address this issue, one prominent theory is the trade-off theory (Modigliani and Miller, 1958). According to this study, companies must balance the benefits arising from increased debt ratios, such as tax advantages, and the costs associated with a higher risk of bankruptcy. Although alternative theories have emerged to explain specific frictions and imperfections of capital markets, trade-off theory remains central to debate in the finance literature because it considers benefits and costs.
While extensive theoretical research exists on the capital structure, a clear methodology for calculating optimal capital structure remains underdeveloped, and empirical evidence on the actual benefits of optimization is sparse. This research aims to fill the gaps by exploring both the theoretical and practical aspects of capital structure in the Russian stock market. Given the critical role of optimal capital structure in maximizing shareholder wealth, it seeks to determine how Russian companies can achieve an ideal balance of debt and equity and whether it provides any benefits.
Most of existing literature in the context of capital structure is devoted to mature markets such as USA, although emerging markets, including Russia, are attracting investors due to their accelerating economic growth. Despite this, the determination of capital structure that maximizes firm value for Russian stock companies remains relatively scarce. Given that capital structure plays a crucial role in maximizing shareholder wealth, it is imperative to study how to determine the optimal level of debt and equity.
The research is structured to investigate the capital structure of Russian companies from two distinct perspectives. Initially, the study examines capital structure trends over time across sectors, analyzing whether firms with lower debt relative to their sector averages are valued higher or lower compared to their more levered peers. This part seeks to derive insights on market perceptions and valuation implications based on these trends. The second perspective involves proposing a model to assess the alignment of companies with the trade-off theory's principles, comparing their realized capital structures with the optimal ratios. It evaluates whether companies that align closely with these optimal structures generate higher returns, thus determining the practical benefits of adhering to the proposed interpretation of an optimal capital structure.
This comprehensive approach contributes to understanding the optimal capital structure for Russian companies and highlights the potential advantages of adopting an optimized approach. The findings will be beneficial for financial managers, shareholders, and industry professionals, aiding in more informed decision-making regarding capital structure adjustments and wealth maximization.
The goal of this research is to estimate the benefits of optimizing capital structure in Russian public companies. The study aims to provide valuable insights into the potential advantages of capital structure optimization and contribute to the understanding of capital structures in the Russian market.
Research Questions:
1. How do different sectors in the Russian market vary in terms of their optimal capital structure?
2. What is the extent of alignment between Russian public companies' realized capital structures and the optimal ratios suggested by the trade-off theory?
3. What are the benefits that can be achieved through capital structure optimization in terms of maximizing shareholder wealth and market capitalization?
Managerial Implications:
The findings of this research will have practical implications for financial managers, shareholders, and industry professionals in the Russian market. By providing insights into the benefits of capital structure decisions, the study can guide financial managers in making informed decisions regarding the debt-to-equity level of their companies. The research can also help shareholders understand the potential advantages of adopting companies with an optimized capital structure for companies, enabling them to assess the long-term value-creation potential of their investments. Additionally, industry professionals, such as valuation departments of prominent companies, can utilize the research findings to provide recommendations to Russian clients on how to optimize their capital structure and enhance market value.
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