Does Corporate Financial Architecture Contribute to Sustainable Corporate Growth? The Evidence From Russian Companies

Abstract

Authors: Irina V. Ivashkovskaya National Research University The Higher School of Economics iivashkovskaja@hse.ru
Anastasia N. Stepanova National Research University The Higher School of Economics
Natalia Eliseeva National Research University The Higher School of Economics

We analyse the relationship between a type of corporate financial architecture and company’s performancein one of the largest emerging capital markets. We contribute to the literature by several additions.First, we apply original concept of sustainable corporate growth based on economic profit criteria,namely opportunity cost of equity capital and residual income spread on equity capital. To capture thechanges in fundamental value of the companies in the sample, we introduce sustainable growth index(SGI) which combines strategic and financial metrics. Second, to understand the determinants of thesustainable growth, we employ the concept of financial architecture which integrates key structural characteristicsof a company: ownership structure (managerial ownership, foreign ownership and ownershipconcentration), corporate governance (the structure of the board of directors and internal control) andcapital structure. We identified the differences in performance measured by SGI of the companies fromthree clusters based on corporate financial architecture on the sample of more than 50 largest Russiannonfinancial companies that publish their reports according to IFRS or US GAAP within 2005–2010years. Our results indicate that corporate financial architecture has a significant impact on the SGI andthe difference in performance does not depend on industry. The companies from three clusters differ byfundamental value drivers, namely sales growth, accumulated residual income equity spread and thevolatility of equity spread. We also examine total shareholder return (TSR) and show that the differencebetween clusters remains not only in fundamental value drivers, but also in investor’s expectations aboutthe future performance. Third, we also show that the differences in sustainable growth of the companiesbetween three types of financial architecture hold in within crisis and post-crisis periods.