Optimal Capital Structure Modelling: Evidence From Emerging Capital Markets

Abstract

Authors: Kokoreva Maria Sergeevna - assistant professor, lecturer, HSE Higher School of Economics, deputy head of the school of finance, researcher of the scientific and educational laboratory of corporate finance, director of the joint educational program for the preparation of bachelors in the direction of "Economics" USU and HSE. E-mail: maria_kokoreva@mail.ru.

Igor Aleksandrovich Belozerov - National Research University "Higher School of Economics"

The paper presents the results of optimal capital structure range analysis which appears in case ofsignificant recapitalization costs.In the presence of recapitalization costs it becomes optimal for firms’ management to change thecapital structure only periodically. This leads to the deviation of the actual leverage from its optimummost of the time. Recent literature on capital structure choice dynamic models support the idea of ofa certain optimal range existence (Fischer et al., 1989; Mauer, Triantis, 1994; Leary, Roberts, 2005;Dudley, 2007; Dang et al., 2012).The study is aimed to test the following hypotheses:Hypothesis 1. Optimal capital structure of companies from emerging capital markets is representedby an optimum range due to the existence of significant transaction costs;Hypothesis 2. An increase in firm size and fixed to total assets ratio leads to a reduction of theoptimal capital structure range, as large companies and companies with a predominance of tangibleassets may have greater flexibility in the choice of sources of funding;Hypothesis 3. Upon reaching the lower / upper boundaries of the optimum capital structure rangethe adjustment to the optimal capital structure is asymmetrical.The empirical analysis is carried out on a sample of large companies BRICS for 2002-2010 years.Results of the study demonstrate the presence of an optimal capital structure range for companiesfrom emerging capital markets. The key determinants of the upper and lower boundaries of therange of optimal capital structure are return on equity, growth opportunities, assets structure andfirm size. Managers of BRICS companies adjust capital structure asymmetrically, reaching differentindicators of capital structure in cases of upper or lower boundaries breakthrough.