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Regular version of the site

Article

Company performance and optimal capital structure: evidence of transition economy (Russia)

Journal of Economic Studies. 2020. Vol. 48. No. 2. P. 313-332.
Spitsin V., Vukovic D., Anokhin S., Spitsina L.

Purpose – The paper analyzes the effects of the capital structure on company performance (return on assets).
The analysis is conducted in a large sample of high-tech manufacturing and service companies in the transition
economy (Russian Federation). In addition to the aggregated analysis, separate investigations are conducted to
scrutinize the impact of company age, size and location factors (the effects of agglomerations). This research
postulates the existence and variability of the optimal capital structure and its dependence on economic crisis.
Design/methodology/approach – We utilized a large sample that includes 1,826 enterprises over the period
from 2013 to 2017. The estimation was performed using the panel-corrected standard error estimation
technique (Prais–Winsten regression) to account for the panel nature and distributional properties of our data.
The existence of the optimal capital structure was assessed based on a curvilinear (quadratic) function.
Findings – The results are consistent with the Static Trade-off Theory and show that this theory is applicable
to countries with transition economy. They demonstrate that effective management of the capital structure can
increase return on assets by 16–22%. The optimal share of borrowed capital is higher for small businesses
compared to larger ones and for enterprises located in agglomerations compared to those located in other
regions. A greater increase in profitability can be achieved by larger firm companies compared to smaller ones.
High share of borrowed capital leads to negative profitability, i.e. to losses by enterprises. No significant
differences in profitability growth were identified between young and mature enterprises. The optimal share of
borrowed capital that maximizes return on assets is in the range of 0–21%.