Capital Structure Management by Share Repurchase for Companies in Emerging Markets

• Published in: Korporativnye finansy Vol. 12; no. 3; pp. 39 - 59
• Main Authors: Kulik, Yulia, Makarova, Svetlana
• Format: Journal Article
• Language: English
• Published: National Research University Higher School of Economics 09.12.2018
• Subjects: capital structure; capital structure determinants; partial adjustment model; share repurchase; speed of adjustment; target capital structure
• ISSN: 2073-0438; 2073-0438
• DOI: 10.17323/j.jcfr.2073-0438.12.3.2018.39-59

According to foreign research into developed markets, share repurchasing influences the speed of adjustment of companies’ capital structure to the target level. It is worth noting that the number of such research studies for emerging markets is rather small. On the basis of an empirical study of a selection of 275 companies from BRICS countries involved in share repurchase for the period of 2005 to 2015 we prove here that share repurchase is an efficient method of correcting an existing capital structure, aligning it to approximate a target level in all BRICS countries. It should be noted that in accordance with our results, companies from Brazil and Russia show the highest speed of adjustment (within 63–80%). This indicates that these companies are able to achieve the target structure within a very short period. Companies from the other countries (India, China, and South Africa) also show a rather high rate of the speed of adjustment (in the range of 44 to 49%). It is worth noting that apart from the share repurchase itself, characteristic features of the companies (as well as special characteristics of local economic factors where they are relevant) influence the speed of adjustment to the target capital structure. We also found out that the most significant factors which have positive effects on the speed of adjustment are the company size, its growth prospects, share of repurchased shares, economic growth rate, inflation rate in the country which adversely affect to a great extent the speed of adjustment to the target capital structure. For Russian companies the most significant determinants are the company size, share of repurchased shares and inflation rate. An assessment of the speed of adjustment to the target capital structure of companies repurchasing shares showed that for Russian companies (for a balance sheet leverage) and for South African companies (for a market financial leverage) the speed of adjustment is not significant, however in general the countries selection and each sub-selection shows that BRICS countries’ companies are prone to adjust to the target capital structure quicker when the financial leverage is lower than the target value, while companies with an excess debt load optimize much slower. On the basis of the research results we offer an algorithm pertaining to capital structure management for the companies acting in emerging markets using share repurchase in an open market.