Abstract
Евгений Валерьевич Илюхин - Кафедра Экономика, Управление и Информатика, Институт Авиационных Технологий и Управления Ульяновского Государственного Технического Университета. Электронная почта: evgeny.ilyukhin@gmail.com
 The relationship between financial leverage and firm performance is studied in this paper. Financial leverage can positively influence firm performance because leverage can be treated as a tool for disciplining management. As such a positive relationship between financial leverage and firm performance is expected based on the agency cost theory. However it is not always applicable to the firms with too high portion of debt. It is because high indebtedness may lead to significant financial limitations and that influences firm performance negatively. A ratio of firm debt to total assets is used as financial leverage measure while return on assets, return on equity and operating margin are employed as firm performance measures. The results for a large sample of Russian joint-stock companies over the period 2004-2013 years show that the impact of financial leverage on Russian firms’ performance has been negative. It can be explained by ineffective corporate control of Russian market, debt attracting difficulties, high growth potential and high interest rates for financing through debt. The findings are robust to using different measures of firm performance, checking sub-samples and time clusters and employing alternative estimation approach. The results thus support pecking-order theory but are not consistent with trade-off or free-cash-flow theories.
Highlights
In the case of a perfect market there is no impact of capital structure on firm value
The reason to indicating a negative relationship between the financial leverage and firm performance variables would be a huge number of growth opportunities in Russian market that is still developing
In order to study the relationship between financial leverage and firm performance in more detail, the whole sample has been divided into several industry sub-samples
Summary
In the case of a perfect market (with no taxes) there is no impact of capital structure on firm value. If taxes exist firm value can be increased through a change in the capital structure, because of the tax advantage that debt payments bring (Modigliani and Miller, 1958). Agency cost and free-cash-flow theories suggest that the capital structure influences firm performance (Jensen and Meckling, 1976; Jensen, 1986). Stockholders try to attract a debt in order to discipline managers through a commitment to existing fixed payments. Management is intended to meet these conditions and that may improve firm’s efficacy Another point is that there is an obligation to disclose information about firm activities to debt holders. All this makes management more open to controlling their activities
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