The Interaction Between Company's Capital Structure and its Effectiveness in Russia

In this paper the interaction between effectiveness of 451 Russian-based manufacturing companies and their capital structures in 2008-2015 was studied. To estimate the effectiveness of the companies, we used the non-parametric method DEA to construct the “best practice” frontier. The effectiveness of each company was determined as the distance to this frontier. Based on the effectiveness scores obtained, we tested the agency-cost hypothesis to find out whether an additional debt leads to an increase of the effectiveness in the next period (Jensen & Meckling, 1976). Also, two competing efficiency risk and franchise value hypotheses were tested 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 results, the agency-cost hypothesis was rejected. The effectiveness of the Russian companies does not increase if the debt level grows. For a number of companies franchise value hypothesis was confirmed.