Western-style capital market reforms in Russia: Implications for market efficiency and firms’ financing decisions

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Abstract

Over the past decade, the Russian government implemented numerous reforms aimed at attracting investor capital and improving the capital market conditions. These reforms included adoption of stringent listing regulations and governance norms, revisions in the tax and ownership laws, restructuring of the major stock exchanges, and more importantly, adoption of International Financial Reporting Standards (IFRS) in 2011. We employ an adaptive market hypothesis (AMH) perspective formulated by Lo (2004, 2005) to examine whether the informational efficiency of the market changed over time as a result of these reforms. While we report that the Russian stock market is still not weak-form efficient, as it was before the reforms, we find the evidence of improvement in efficiency over time. Next, we find that financing decisions of Russian public firms changed following adoption of IFRS when financial statements became more transparent and better aligned with informational needs of local and foreign investors. Particularly, Russian companies that adopted IFRS were more likely to raise finance via issuance of equity rather than debt instruments, whereas for non-adopters there was no change in the firm capital structure. Finally, we report that there was an increase in the inflow of foreign direct investments (FDI) in the post-reform period, suggesting that the above noted reforms conferred significant benefits to the entire Russian economy.

Keywords: IFRS Adoption, Russia, Capital Structure, Market Efficiency

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G15, G32

Received: 08.08.2020
Accepted: 30.09.2020
Published online: 02.10.2020

How to cite this paper: Kim, O. (2020). Western-style capital market reforms in Russia: Implications for market efficiency and firms’ financing decisions. Risk Governance and Control: Financial Markets & Institutions, 10(3), 62-74. https://doi.org/10.22495/rgcv10i3p5