The Capital Structure of Russian Companies: Testing Trade- off Theory versus Pecking Order Theory

The capital structure researches, carried out on the emerging markets, are mainly devoted to the analysis of the companies’ choice determinants of the debt to equity ratio. The fact that these problems stir a lot of interest to day may be explained by a number of reasons and, first of all, by lasting substantial capital market institutions’ differences, the level and factors of investment risks that differ from those of the countries with developed market economy. The question of evaluating the degrees of influence similar determinants have on the long-term financial development of companies operating in different structures of the capital market is being posed. The dynamics and driving forces of possible changes in the emerging company capital structures on such markets are still to be investigated. Finally, there is a separate substantive issue of assessing the role of capital structure and its potential contribution in maximizing company value on the emerging markets. This article is thus aimed at constructing a model that could describe the capital structure choice of the Russian major public companies. The two basic capital structure theories аre being tested: the Pecking Order Theory and the Trade-off Theory. The article is presented in the following way: in the first part we give an overview of the research papers on the problem of capital structure in the emerging markets, the second part focuses on the methods used for testing the above mentioned theories and analyses of our sample of the Russian data and methodology, and, finally, in the third part we introduce and interpret the results of the empirical analysis. 1. The Capital Structure Research Based on the Emerging Markets Data The research in the area of capital structure in the emerging markets has only recently appeared. It is mostly focused on the determinants of debt to equity choice. The capital structure choice has always been one of the crucial elements of the whole financial architecture of the firm [Myers, 1999] which includes debt - equity, firm’s ownership structure and instruments of internal corporate governance and control and, thus, becomes the key factor of the firm’s value. It has been also demonstrated that the capital structure is vital for the appropriate development of the relationships between company’s stakeholders [Titman et al., 1997]. There are heaps of papers devoted to the capital structure on the developed markets whereas emerging markets still lack thorough investigation. The researches of the latter are mostly represented by a limited number of European and Asian countries, such as Hungary [Nivorozhkin, 2002]; India [Bhaduri, 2002]; the Czech Republic, Turkey, Taiwan, Thailand, [Harvey et al., 2004]; Thailand [Wiwattanakantang, 1999]. The case is even more dramatic when speaking about Russian companies. Most of the literature on capital structure in Russian firms ends up with a statistics devoid of any analysis of the modern corporate finance methodology. One could put forward an argument that this situation should not be a case of worry when speaking about Russian companies because we could simply keep in mind the results of the studies already conducted on the developed capital markets data.