Effect of Peer Firm' Capital Structure on Companies' Financial Policies in Russia

Main focus of this paper is to measure relationships between own financial policy of a firm and financial policy of its competitors. Historically, literature on the topic of capital structure focused on own characteristics of firm, while assuming, that its peers’ actions do not matter. However, as more recent works show, there exists a significant dependency between firm’ capital structure choice and choice of its peers. This research focuses on Russian sample of companies. Additionally, using previously established methods of reduced form equation estimation based on idiosyncratic return shocks measured by asset pricing models, this research addresses and attempts to solve issue of endogeneity problem usual for this type of problem. Sample consists of 36 Russian publicly traded companies for time period from 2012 to 2015. Using their example, hypothesis of interconnectedness between own book and market value of leverage and book and market values of leverage of its peers is tested, while accounting for other financial variables. The result of this research was inconclusive. While a significant linear relationship between aforementioned variables was established, endogeneity problem was not solved in full, which reduces quality of used models. To achieve more accurate results, it is necessary to increase sample size and improve quality of asset pricing model employed to calculate idiosyncratic equity return shocks.