Sources of Financing of the Machine-Building Industry of the Rostov Region: Analysis and Evaluation

Abstract

Purpose: Study of financing sources and assessment of the impact of the weighted average cost of capital on the profitability of assets, using the example of enterprises of the machine-building industry of the Rostov region. Methodology and Data: A summary of available studies confirms that industry in the Russian regions when choosing financing sources faces problems characteristic of emerging markets: high cost of bank financing sources, inaccessibility of alternative financing sources, low payment discipline of counterparties, and asymmetry of information. The research was carried out on a sample of industrial enterprises of the Rostov region using the postulates of the weighted average cost of capital and theories of choosing financing sources. Results: The analysis shows that in conditions of unfavorable choice and asymmetry of information characteristic of regional markets, industrial enterprises prefer the principles of hierarchy theory, which are less subject to information costs and minimize risks. It has been found that more cost-effective enterprises have higher financial independence. The weighted average cost of capital was found to be quite low. We assume that this is due to the fact that the price of borrowed sources of financing for industry is higher than its own. This is the reason for the non-public nature of most industrial enterprises, which, firstly, allows them to pursue a “soft” dividend policy, and secondly, makes sources of external financing inaccessible and expensive due to the high asymmetry of information. Originality: The hypothesis put forward about the positive impact of the size of industrial enterprises of the Rostov region on the choice of debt sources of financing is confirmed. The larger the size of the company, the higher the share of long-term borrowed sources of financing, which corresponds to hierarchy theory. We also found that in the formation of financing sources for small industrial enterprises of the Rostov region, internal factors are higher than macroeconomic ones.