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Mutual Influence of Company's Capital Structure and Shares Liquidity

Student: Kseniya Blagushina

Supervisor: Irina Khvostova

Faculty: Faculty of Economics

Educational Programme: Economics (Bachelor)

Year of Graduation: 2016

This paper presents the results of empirical research on the assessment of the mutual influence of the company’s capital structure and stock’s liquidity. To obtain a better understanding of the background of this assumption the detailed analysis of some theoretical and empirical models is carried in the study. During the work on the theoretical basis of the question of the relationship between the leverage and liquidity of shares, it has been identified that the scientific community has considered this topic in two key aspects. On the one hand, the impact of the financial leverage on the share’s liquidity is estimated. Another group of scientists focus on the study of the influence the liquidity of the company's securities on the capital structure. Proceeding from this situation, the practical section of the current study also consists of two main parts. Similar tests have been successfully carried out on the example of foreign companies. The most significant contribution of this research is to adapt the existing methodology for the analysis of the Russian companies. In order to test two main hypotheses of the study, the separate regression model is developed for each of them. The proportion of the borrowed capital is used as the company’s leverage. The liquidity of shares was calculated in two ways: by the formula Amihuda and using a modified turnover ratio of the enterprise’s shares. The study revealed that the share of borrowed funds in the capital structure of companies is reduced by increasing the liquidity. Conversely, the liquidity of equity securities grows with an increase in lending. The result of the work is the justification of the relationship between shares’ liquidity and leverage, based on the econometric analysis, which is expected to benefit the information users.

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