The Effects of Capital Structure on Performance and Market Value of Russian Public Heavy Industry Firms

Despite the fact that capital structure is a valid and important tool of financial management, as proven by prior research, little academic inquiry seems to be made into the Russian market. This article aims to close the gap by exploring the effects of capital structure on financial performance and market value of Russian public heavy industry firms. To achieve this, annual reports of 110 public firms from 2019 to 2022 are analysed through random effects and, additionally, fixed effects regression. Two measures of performance (return on assets, return on sales), two measures of value (stock returns, capitalisation-to-assets ratio), and two measures of capital structure (leverage, leverage growth rate) are used. Key discoveries show that leverage has negative effects on performance in the base period, while its effects on value appear to be in contradiction. In addition, the first lag of leverage is found to have a positive effect on both measures of performance. The results indicate that, ceteris paribus, it may not be beneficial for firm performance to select debt as a source of investment financing – at least in such an uncertain environment as the current Russian context. Providing instrumental knowledge for capital structure strategy formulation, the study explains its findings through mechanisms of the tradeoff theory and emphasises how capital structure management guides companies to superior rates of performance.