The Agency Costs Theory of Capital Structure in Emerging Markets

Agency costs theory of capital structure is quite an urgent theme for many firms, especially for those located in the emerging markets. This happens due to informational asymmetry, undeveloped legal procedures and some other issues. In this thesis we analyzed agency costs theory of capital structure in emerging markets. Analysis was conducted based on the panel data for five regions in emerging capital markets for calendar years 2004-2014. The regions under investigation were China, Latin America, Russia, Africa and South Asia (except for China). We checked the various models and chose the one that fits our data better. Simultaneous equation model confirmed that agency costs theory is valid in emerging capital markets. The results showed that there is a complex relationship between agency costs of debt and equity and capital structure of the firms. Agency costs of equity are proven to have mutual negative connection with capital structure whereas agency costs of debt, which are quite severe for firms with high growth rates of capital expenditures due to underinvestment problem, have a positive relationship with firms’ capital structure. Moreover, agency costs of debt are shown to have a significant influence on capital structure especially for the firms with low growth rates of capital expenditures. The results obtained in this thesis may be subject to further investigation.