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ABSTRACT
This paper estimates the degree of financial constraints faced by Russian publicly traded companies using the two most common approaches in the literature. We find that both Russian company investment and cash holdings are sensitive to cash flows, suggesting that the average sample firm is financially constrained. State-owned companies appear less financially constrained. After 2014, when economic sanctions restricted access to foreign capital, Russian companies became more financially constrained and more dependent on accumulated cash reserves. Overall, our findings highlight the importance of financial constraints in the context of developing countries.
Acknowledgments
We would like to thank the anonymous referee and the University of Arkansas professors for helpful discussions and valuable comments. Part of this research was written while the first author was a doctoral student at the University of Arkansas. We are responsible for all remaining errors and omissions.
Disclosure Statement
No potential conflict of interest was reported by the author(s).
Notes
1. According to Standard and Poor’s surveys, the average transparency score for Russian companies is lower than that for companies in developed countries (Enikolopov, Petrova, and Stepanov Citation2014). In addition, Deloitte’s (Citation2012, Citation2015) corporate-governance surveys of public Russian firms report that a low proportion of outside directors, concentrated ownership, and a significant share of government-related companies (as a percentage of market cap) are among the major weaknesses of corporate-governance structures in Russia. Deloitte’s reports also note that the corporate-governance condition has not improved since 2012, which represents a major risk factor for the firms’ performance.
2. Firms’ industry distribution shows that mining (oil, gas, and other natural resources) comprises only a small proportion of the sample (approximately 10%). Manufacturing firms and utilities constitute more than 80% of the sample. Public-utility companies emerged after the Russian energy-producing monopoly, RAO UES, was unbundled into more than 20 wholesale trading and generation companies in 2006. The government exerted efforts to attract investors into energy generation by listing the new companies and selling the stocks through open auctions. Financial and public-administration companies as well as banks are specifically excluded from the dataset to avoid modeling these companies’ specific investment practices.
3. This requirement ensures that firms have low payout ratios approximately 40% of the sample period (or more). In an unreported analysis, the results hold for other classification schemes based on the payout ratio.
4. Because sanctions were imposed in 2014, the year 2014 is included in the first period, and the period “after 2014” starts from 2015.
5. Most likely, Russian firms experienced a decline in investment opportunities, which attenuated the need for saving cash.
6. The composition of the index during the 2012–2021 period is very stable, most of the companies being members for the entire sample period.
7. The main indicator, Gov, is dropped because we use firm-fixed effects in the regression.
8. An unreported analysis shows that the baseline results are robust to using the method of high-order cumulants (Timothy, Jiang, and Whited Citation2014) as an additional approach to addressing the measurement bias in Tobin’s Q.
Additional information
Notes on contributors
Tatiana Salikhova
Tatiana Salikhova is an Assistant Professor, PhD in Finance, and a member of the Department of Finance and Operations Management at the University of Tulsa (USA). She teaches core finance classes on investments and corporate finance. Her main research area is corporate finance with a focus on questions in international finance, supply chains and corporate governance.
Irina Nikitushkina
Irina Nikitushkina is a Docent (Associate Professor), PhD, and the member of the Faculty of Economics at the Lomonosov Moscow State University (Russia). She also serves as the Director of the master’s program in “Financial Economics” and leads programs in additional education focused on financial topics. Additionally, she serves as the Director of the Center for Applied Financial Research. Her research interests lie in corporate finance, business valuation, mergers and acquisitions, and business restructuring, and she has authored more than 50 educational manuals, monographs, and research publications.