The Impact of Capital Structure on the Performance of Serbian Manufacturing Companies: Application of Agency Cost Theory

Abstract

This paper examines the impact of debt in the capital structure on agency costs and therefore on the performance of a company. The efficiency of companies was estimated using two parametric techniques: Ordinary Least Squares (OLS) methods and a Stochastic Frontier Analysis (SFA). The estimated efficiency represents a measure of (inverse) agency costs. Agency costs cause a lower level of efficiency compared to companies that have minimized these costs, and companies that reach the efficiency frontier, in the observed context of this research, are viewed as those that have minimized agency costs. A panel regression model was applied in order to determine the direction and intensity of the influence of leverage and control variables on the initially estimated efficiency of the company. The results of this research on Serbian manufacturing companies show the expected positive effect of capital structure (leverage) on the efficiency of the company, which is in accordance with the predictions of the agency cost theory. The contribution of this research is reflected in the application of efficiency as a performance indicator in the observed context of examining the theory of agency costs, bearing in mind that the measure of efficiency is closer to the theoretical view of these costs.