1. Introduction
The economic activity of companies presupposes the availability of appropriate resources. Resources include all assets, capabilities, organizational processes, company attributes, information, knowledge, etc., which are controlled by a company and which enable it to design and implement strategies that improve its efficiency and effectiveness [
1]. In order for a company to operate successfully in market conditions, it is necessary to dispose of appropriate resources and to successfully use resources in achieving tasks and goals [
2] (p. 31). Krtstić and Sekulić [
3] emphasize the importance of managing the use of resources in order to achieve the economic and non-economic goals of a company. Organizational goals represent an organization’s reason for existence and the outcomes it seeks to achieve [
4] (p. 74). Komazec, Tomić and Jakovčević [
2] (p. 32) define goals as the desired state toward which the entire activity of a company is directed.
One of the assumptions on which the traditional theory is based is that the goal of a company is to maximize profits, which implies that the “company” somehow has a mind of its own capable of arriving at independent, rational decisions. In reality, of course, companies do not make decisions; it is entrepreneurs, managers and employees (i.e., individuals) who make business decisions, while a “company” is nothing more than an abstract concept that includes owners, managers and employees [
5] (p. 194). Jensen and Meckling [
6] (p. 311) view each company as “a legal fiction which serves as a focus for a complex process in which the conflicting objectives of individuals are brought into equilibrium within a framework of contractual relations.” The aforementioned conflict is particularly significant for re-examining the traditional goal of a company’s operations.
In the case in which a wholly owned company is managed by its owner, the traditional assumption of profit maximization is acceptable. However, since each person has their own interests and consciously enters organizational systems in order to realize their personal interests more fully and comprehensively through them, due to the diversity of people and their interests, during their realization, there is a conflict of the interests of individuals and organizational systems. Also, any conscious association of people into certain types, forms and modalities of organizational systems limits the freedom of behavior, thereby limiting the possibilities for the desired realization of personal interests. Likewise, any aspiration and effort to satisfy personal interests more fully at the expense of other people in the structure of an organizational system disrupts organization and thus the efficiency and effectiveness of the functioning of the organizational system and the achievement of its goals [
7] (p. 220).
Over time, the relationship between ownership and control in companies has changed substantially, from the earliest forms when companies were owned and managed by the same people to the development of large corporations in which a separation of ownership from control emerged. Ownership is in the hands of shareholders, while control is largely in the hands of the senior managers and executive directors of the company. This situation is described as managerial capitalism and has led to “managerial theories” to explain the behavior of companies [
5] (p. 194). Managerial theories view each company as a “coalition” of managers, workers and owners, and each group has its own objectives [
8] (p. 25).
Different groups within a company (owners, managers, creditors, and the community) have very different interests and incentives, which can result in a conflict of interest between them. The costs caused by these conflicts are called agency costs [
9] (pp. 15–16). A governance system in which ownership and management are separated can create potential costs due to conflicts of interest [
10] (p. 574). Costs due to conflicts of interest arise when managers or other interest groups undertake activities that conflict with the interests of the company’s owners. In joint-stock companies in the private sector, shareholders (the owners or “principals” of the firm) appoint directors as their “agents” to manage the firm efficiently; that is, a principal–agent relationship arises which raises the whole question of the objectives of companies and management and the subject of corporate governance. Profit maximization and therefore the drive for a more efficient use of resources, though presumably desired by shareholders, may not always be the primary goal of managers [
5] (p. 90). The assumption of profit maximization can be replaced by alternative goals which management aims to achieve, such as sales revenue maximization, managerial utility maximization and corporate growth maximization [
5] (p. 200).
The agency conflict between a manager (agent) and outside shareholders (principal) arises due to the manager’s tendency to appropriate perquisites out of the firm’s resources for his own consumption but also due to the reduction of his efforts in finding and realizing profitable ventures, which can lead to the company’s value being significantly lower compared to the case in which the company is fully owned by the manager, so he is encouraged to be more personally involved in the aforementioned activities [
6]. Although in theory managers, as agents of shareholders (principals), should manage the assets in the interests of the principals, in practice, this cannot be guaranteed. In practice, agents may lack incentives or motivation to pursue their principals’ goals, and the principal–agent relationship may involve costs in terms of lower efficiency. At the root of the problem lies the fact that the principal faces costs, not least in terms of time and effort involved, in monitoring the work of their agents [
5] (p. 197).
Jensen and Meckling [
6], in the theory they developed, explain why the manager of a company whose capital structure contains both debt and outside equity undertakes activities so that the total value of the company is less than it would be if the manager were its sole owner and why their failure to maximize the value of the company is perfectly consistent with efficiency. If both parties seek to maximize utility, there is good reason to believe that the manager (agent) will not always act in the best interest of the owner (principal). On the other hand, the principal can limit divergence from their own interests with the appropriate incentives for the agent and by incurring monitoring costs designed to limit the agent’s aberrant activities. In addition, in some situations, the principal will pay the agent to expend resources (bonding costs) to guarantee that the agent will not take certain actions which would harm the principal or to ensure that the principal will be compensated if the agent does take such actions. In most agency relationships, the principal and the agent will incur positive monitoring and bonding costs (non-pecuniary as well as pecuniary) and, in addition, there will be some divergence between the agent’s decisions and those decisions which would maximize the welfare of the principal. The monetary reduction in welfare experienced by the principal due to this divergence is also a cost of the agency relationship and is called a “residual loss” [
6] (p. 308).
Since agency costs are as real as any other costs, the objective is to minimize them. The objective is not the minimization of the residual loss but the sum of all agency costs, which include monitoring and bonding costs; therefore, the levels of these activities should satisfy the conditions of efficiency. The above will not result in the company being run in a manner so as to maximize its value since agency costs inevitably arise as a result of an agency relationship and the value of a company in which there is a separation of ownership and control will, as a rule, always be lower than that of a company which is wholly owned by its manager. The reduced value of the company caused by the manager’s consumption of perquisites is “non-optimal” or inefficient only in comparison to a world in which we could achieve compliance of the agent with the principal’s wishes at zero cost or in comparison to a hypothetical world in which the agency costs were lower [
6]. Therefore, comparing the real world with an ideal but nonexistent world in which agency costs do not exist and concluding that the real world is (relatively) inefficient would be a typical example of what Demsetz [
11] calls the Nirvana fallacy, since agency costs (monitoring and bonding costs and “residual loss”) are an unavoidable result of an agency relationship [
6].
An increase in the company’s leverage can reduce the agency costs of outside equity, but the opposite effect can occur with the agency cost of debt, which arises as a result of a conflict of interest between shareholders and debt holders [
12] who have different requirements for the cash flows generated by the company. Agency costs arising from conflicts between debt holders and equity holders or from different principal–agent objectives will give rise to resource misallocation and the sacrifice of potential output [
13], which will cause a lower level of efficiency compared to companies that have minimized these costs.
The nature of the relationship between the level of debt in a firm’s capital structure and economic performance represents one of the most important issues in corporate governance [
14]. This paper examines the role of debt as an internal mechanism of corporate governance in mitigating conflicts between the owners and manager of a company and its effect on company performance. The aim of this research is to analyze the impact of capital structure on efficiency as a measure of company performance. 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 closely related to the theoretical definition of these costs. The importance of the application of the mentioned concept is reflected in the fact that in addition to evaluating the efficiency of a company’s use of resources, it also represents a relative measure of performance in relation to other companies. Therefore, unlike simple financial indicators, the analysis of company efficiency identifies potential deviations between the actual and optimal (maximum potential) performance of companies. Bearing in mind that agency costs lead to resource misallocation and the sacrifice of potential output [
13], the estimated efficiency of a company is closer to the theoretical view of these 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. Therefore, the estimated efficiency represents a measure of (inverse) agency costs.
The remainder of the paper is organized as follows.
Section 2 reviews corporate governance mechanisms to mitigate the agency problem with special emphasis on debt as one of the internal mechanisms of corporate governance and describes research hypothesis development based on a literature review.
Section 3 describes the research methodology of this study, such as the selection of the research sample, data collection, variable selection, model specification and data processing methods.
Section 4 presents the empirical findings and discusses the theoretical and practical implications of this research. Finally,
Section 5 concludes this article, states the limitations of this research and provides scope for further research.
4. Data Analysis, Results and Discussions
Table 1 presents descriptive statistics. The efficiency of the companies was estimated using two parametric techniques. The average efficiency of companies in the observed period, estimated using the COLS method, is 0.38. The efficiency estimated using the SFA method shows that the average efficiency of the analyzed companies is 0.72. The average efficiency usually differs between the two studied methods [
69,
70,
71]. COLS and SFA are completely different methodologies that take completely different approaches when estimating the efficiency frontier, and it is quite expected that the average scores are different. The average total leverage of the analyzed companies is 0.56, varying widely from 0.03 to 4.63. The average value of total leverage is comparable to the leverage values obtained in other studies conducted in developing countries, where it is significant to point out that high values of total leverage are due to very high levels of short-term leverage, while on the other hand, these companies have a very low level of long-term leverage [
53,
72]. Since the sample consisted of companies that were in operation for all years of the observed period, the above also influenced the average age of the analyzed companies to be relatively high. What is particularly worrying based on the descriptive statistics presented is that extremely low average profitability characterizes the analyzed companies.
This section will present the results of testing hypothesis H1 using Equations (1) and (2), and then hypothesis H2 using Equations (4) and (5) in order to test the effect of leverage on the efficiency of the companies. Estimates using two models will be presented. In the first model, the efficiency of the company was assessed using the COLS method, while in the second model, the efficiency of the company was assessed using the SFA method.
To test Hypothesis H1, which assumes that there is a positive relationship between leverage and company efficiency, a linear specification of leverage was used, while since hypothesis H2 assumes that at a high level of leverage, the relationship between leverage and company efficiency changes from positive to negative, the quadratic specification of leverage was used to test H2.
A multiple regression analysis of panel data was conducted using common panel data estimation techniques. A Pooled Ordinary Least Squares (OLS) regression model, a Fixed Effects (FE) model and a Random Effects (RE) model were used. To select the appropriate model between the Pooled OLS and RE models, the Breusch–Pagan LM test was used. The Breusch–Pagan LM test tests the null hypothesis that there are no significant differences between observation units (i.e., no panel effect), or formally:
Null Hypothesis. The variance between observation units is zero.
The results of the chi-square statistic show that the RE model is more credible than the Pooled OLS model. Since p < 0.05 (p = 0.000), null hypothesis is rejected. This test proves that there is a panel effect and that the Random Effects model is better (a model that is credible) for estimation than the OLS model. Since it has panel effects, an FE model and an RE model were estimated.
The evaluation results of the RE model are presented in
Table 2, and the FE model is presented in
Table 3. The results of both models show a positive and statistically significant relationship between leverage and efficiency.
In order to choose which of these two models is better, i.e., consistent in assessment, the Hausman test was applied. With it, we tested the null hypothesis that the differences in coefficients between the FE model and the RE model are not systematic, that is, that there is no significant difference between the models, i.e., both models are consistent.
Null Hypothesis. Differences in coefficients are not systematic.
Based on the Hausman test statistic value of 25.02 with a probability of 0.0003, at a significance level of 5%, Null hypothesis was rejected.
The results confirm the positive relationship between the capital structure and the efficiency of companies. There is a positive and significant marginal effect of leverage on efficiency and the model predicts that a unit change in total leverage could affect the change in efficiency by 0.0445.
As for other variables that can have an impact on efficiency, the evaluated model shows that with a percentage change in size, an increase in efficiency by 0.0021 is expected. A unit change in asset tangibility and profitability can be expected to have a positive marginal effect on efficiency, while a unit change in risk assumes a decrease in efficiency by 0.0068. The age variable is not significant at the 5% significance level, but it is significant at the 10% significance level and has a negative effect on the efficiency of companies. The ownership concentration variable has no significant effect on efficiency.
In the following section, the results of the model in which efficiency was assessed using the SFA method will be presented. Since the Breusch–Pagan LM test showed that there are significant differences between the observed companies (test statistic value of 52.28, with a probability of 0.0000), the RE model is more credible for estimation than the OLS model.
Table 4 shows the results of the RE model for SFA efficiency.
By applying the Hausman test, based on the test statistic value of 35.08 (p = 0.0000) at a significance level of 5%, it was proven that the FE model is consistent in the estimation, and the interpretation of the results of this model follows.
The results of the FE model for SFA efficiency are presented in
Table 5.
As in the previous model in which the dependent variable was the efficiency assessed using the COLS method, in the model of efficiency assessment using the SFA method, there is a positive and significant marginal effect of leverage on efficiency. If the leverage increases by 1, it is expected that the efficiency increases by 0.0106.
Regarding other variables, there is a positive and statistically significant relationship between company size, age, risk and efficiency. The ownership concentration variable, as in the previous model, is not significant for this model specification, nor is the profitability variable. The relationship between risk and efficiency is negative, and the model predicts that a unit change in the risk measure would affect the reduction in efficiency by 0.0158.
Both models show a positive effect of capital structure on the efficiency of the company. However, since the agency costs of debt can reverse this relationship at very high leverage levels, hypothesis H2 was tested using a non-linear specification of leverage.
In order to test hypothesis H2, which predicts the existence of a non-linear relationship between the capital structure and the efficiency of the companies, a non-linear model specification was used which allowed the relationship between the capital structure and the efficiency of the companies to be non-monotonic, i.e., it was able to change from positive to negative at a high leverage level.
A Breusch–Pagan LM test statistic value of 174.5 (
p = 0.0000) proved that the RE model is more credible for estimation than the OLS model. The results of the RE model are presented in
Table 6.
The Hausman test statistic value of 25.02 with a probability of 0.0008 and a significance level of 5% proved that the FE model is consistent in the estimation.
Table 7 presents the results of the non-linear relationship between capital structure and COLS efficiency using the FE model.
The results in
Table 7 show the existence of a non-linear relationship between leverage and efficiency. The coefficient of quadratic leverage is negatively and statistically significantly related to efficiency, indicating that leverage at a high level is negatively related to efficiency. A marginal effect of leverage on COLS efficiency, b2 × Lev
2 = −0.0020466 × Lev
2 = 2 × (−0.0020) × Lev, i.e., with a marginal change in leverage, is expected to decrease efficiency by 2 × (−0.0020) × Lev.
Regarding other variables, company size, the tangibility of assets and profitability have predicted positive and significant effects on efficiency, while the expected effect of risk on efficiency is negative. The variables leverage, company age and ownership concentration are not significant in this model specification.
The non-linear relationship between capital structure and efficiency was also tested in the model in which the dependent variable was estimated using the SFA method. Applying the Breusch–Pagan LM test based on the test statistic value of 20.33 (p = 0.0000) proved that the RE is consistent in its estimation compared to the OLS model.
Table 8 presents the results of the non-linear relationship between capital structure and SFA efficiency using the RE model.
To select the appropriate model between the FE and RE, the Hausman test was applied. A Hausman test statistic value of 40.36 with a probability of 0.0000 at a significance level of 5% shows that the Fixed Effects model is consistent in its estimation. The results of the model using the FE method are shown in
Table 9.
The results of the FE model confirm that the relationship between capital structure and efficiency is non-linear. A significant increase in leverage is expected to reduce efficiency.
There is a statistically significant positive relationship between the size of a company and efficiency. Also, a statistically significant positive relationship exists between the tangibility of assets and the efficiency of a company, and with a marginal change in the aforementioned independent variables, the estimated value of efficiency is expected to increase. The relationship between company age and efficiency is negative. The variables ownership concentration, risk and profitability are not statistically significant.
Based on the presented results of empirical research on the impact of capital structure on the efficiency of companies in the Republic of Serbia, it can be concluded that research hypotheses H1 and H2 have been confirmed.
The existence of debt in the capital structure, on one hand, reduces the agency costs of equity and thereby contributes to increasing the efficiency of companies, while on the other hand, with very high leverage, the agency costs of debt can exceed the agency costs of equity, which increases the total agency costs and consequently reduces the efficiency of companies. Hypothesis H
1 assumes that higher leverage motivates managers to act more in line with the interests of shareholders, i.e., a higher level of leverage is expected to reduce the agency costs of equity and thereby increase the efficiency of companies. Bearing in mind that the stated hypothesis was confirmed in all models, it can be concluded that the existence of debt in the capital structure represents a useful mechanism for controlling the opportunistic behavior of managers and acts as an incentive for managers to act more in accordance with the interests of the owners. However, when leverage becomes very high, the disciplining effect of debt can disappear. By confirming research hypothesis H
2, which assumes a non-linear relationship between leverage and the efficiency of companies, the negative effect of very high leverage on the efficiency of companies in the Republic of Serbia was identified. Very high leverage can limit a company’s flexibility and affect the company’s investment activities in such a way that it significantly limits or directs it to very risky projects, which increases the expected costs of bankruptcy and causes the loss of the disciplinary effect of debt. The research results are in accordance with the predictions of the agency cost theory that the existence of debt in the capital structure reduces the agency costs of equity in a way that encourages or limits managers to behave more in accordance with the interests of owners. Agency costs caused by conflicts of interest between owners and managers or owners and creditors will give rise to resource misallocation and potential output will be sacrificed [
13], which will cause a lower level of efficiency compared to companies that have minimized these costs.
The research results are partly in agreement with other empirical research studies. Fernandes, Vaz and Monte [
44] determined a positive and statistically significant effect of leverage on the efficiency of companies in Portugal, with the fact that in the mentioned research, short-term leverage was used to express the capital structure of companies. However, bearing in mind that companies in the Republic of Serbia also predominantly rely on short-term rather than long-term debt [
53], the results are not entirely incomparable. Margaritis and Psillaki [
13] found a positive and significant effect of leverage on the efficiency of companies in France. The cited authors show that debt is more significant for companies operating in industries with fewer growth opportunities since the effect of debt on efficiency is greater for companies in traditional industries (chemical and textile). Margaritis and Psillaki [
45] confirm the positive and significant effect of leverage on efficiency in New Zealand companies as well. The results of Margaritis and Psillaki [
45] show a positive and significant effect of leverage on efficiency even in the case of quadratic leverage, which shows that the determined effect remains positive in the entire relevant range of leverage values. Ankamah-Yeboah et al. [
43] confirm that the agency cost hypothesis holds in the Mediterranean aquaculture sector such that leverage has an inverted U-shaped relationship with performance. This implies that increasing leverage increases efficiency, but efficiency begins to decrease at sufficiently high levels of leverage. The determined effect on efficiency is confirmed with short-term, long-term and total leverage. Berger and Di Patti [
12] also identified a positive and significant effect of leverage on estimated efficiency. The established positive effect remained present even at a very high level of leverage, but it should be kept in mind that the research sample in this research consisted of banks, and that the results of the research are not entirely comparable since banks have a different capital structure compared to companies operating in other industrial sectors and because their operations are highly regulated. Also, unlike Fernandes, Vaz and Monte [
44], Margaritis and Psillaki [
45] and Margaritis and Psillaki [
13], who used technical efficiency, Berger and Di Patti [
12], in their research, used profit efficiency as a measure of (inverse) agency costs. Le and Phan [
46] found a non-linear relationship between short-term leverage and company performance in Vietnam, i.e., that at a high level of leverage, the relationship between leverage and company performance changes from positive to negative, with the authors using ROE to express company performance. Nguyen and Tran [
36], using a sample of Vietnamese listed firms, found that there is a non-linear relationship between leverage and firm performance (ROE). These findings are consistent with the agency cost hypothesis.
Regarding other variables, the expected positive and significant impact on efficiency in all models was identified for firm size and asset tangibility. The identified positive impact of size on company efficiency confirms the theoretical views that large companies take advantage of the economy of large scale [
62] and better coordinate their resources [
61]. Contrary to the stated theoretical view, Fernandes, Vaz and Monte [
44] and Margaritis and Psillaki [
45] identified a negative and statistically significant effect of size on the efficiency of companies, while Margaritis and Psillaki [
13] found that the effect of company size on efficiency is not monotonic, i.e., the expected effect on efficiency is positive for smaller companies but negative for large companies. Also, regarding asset tangibility, Margaritis and Psillaki [
13] shows a non-monotonic effect—negative at a low level, while at a high level of asset tangibility, the effect is positive. Fernandes, Vaz and Monte [
44] identified a negative and statistically significant effect of asset tangibility on efficiency. Most of the presented models show the expected negative effect of risk on the efficiency of companies, while in comparable studies, this variable did not prove to be significant.
The agency cost hypothesis (H1) was confirmed by all models, so it can be concluded that in the context of the analyzed companies, debt financing can act as an internal governance mechanism in constraining managers’ misuse of resources, thus reducing agency costs and contributing to improvement in the company’s performance.
Agency costs might be significantly higher in countries with weak legal systems and poor investor protection; therefore, corporate governance matters more in these countries [
73,
74]. Emerging markets are prone to managerial discretion to a greater extent compared to Anglo-American countries. The managers in these economies tend to manage funds inefficiently, and this directly effects firm performance [
38] (p. 2). The opportunistic behavior of managers can be curtailed through a good set of internal and external corporate governance principles. Leverage is considered an agency-mitigating mechanism as outsiders monitor the actions of managers with respect to efficient contracting [
38] (p. 4). An increase in leverage provides greater incentive for lenders to monitor managers’ actions and decisions more closely, reducing agency costs [
37] (p. 140). Emerging markets provide an excellent laboratory to test the governance potential of debt, given that the shareholders of emerging market firms typically suffer from misaligned managerial incentives, ineffective legal protection [
75] and underdeveloped markets for corporate control. Debt should create value for firms with high expected agency costs if the use of debt directly reduces overinvestment or allows firms to signal that they do not or will not overinvest [
41] (p. 4).
However, although the application of the Hausman test proved that the FE model is consistent in the estimation of both efficiency models (using the COLS and SFA methods) and H
2 was proved by the FE model, the obtained results should be taken with some caution. One of the limitations of this research refers to the use of total leverage as a proxy for capital structure. Companies in developing countries have a very high degree of participation of short-term financing sources in the capital structure [
53,
72]. Not all forms of debt are equally likely to curtail overinvestment. For instance, with short-term debt, managers must frequently face the scrutiny of capital markets to refinance principal [
41] (p. 6). Therefore, it would be very important in future research to separately analyze the impacts of short-term leverage and long-term leverage on companies’ performance, as well as whether the established effects change at extremely high values of these indicators since this could potentially shed a different light on the research results and their implications.
5. Conclusions
A company’s operations are affected from an internal perspective by the relationship between participants in the governance system, shareholders, creditors and employees, and the external aspect of corporate governance is focused on the relationship between the company and external stakeholders, namely the governments of countries, state authorities and the local community in which the company operates. The role of all the abovementioned participants in their interaction varies significantly between countries, but there is a general agreement that modern economic societies cannot effectively perform their activities while simultaneously ignoring the interests of interest groups [
76] (p. 2). As the main engine of national economic development, industrial enterprises generate high GDP growth while causing numerous negative impacts for the ecological environment [
77]. Corporate social responsibility is seen as necessary to enable businesses to satisfy the demands of changing times and achieve sustainable growth [
78] (p. 243). In this competitive world, every nation tries to acquire sustainable economic solvency. For this, rapid economic growth via the elevation of the production level is a prerequisite [
79] (p. 166). Financial development encourages the transformation of savings into investment, which leads to the inflow of capital to new types of industries, eliminates backward industries and promotes industrial upgrading [
80] (p. 4710). In the process of economic development, traditional innovation activities focus on improvements in production efficiency and reductions in costs, and the input and output of innovation focus on the technical level and obey the mainstream economic analysis paradigm [
80] (pp. 4697–4698).
At the heart of corporate governance literature is the effect of capital structure impact on firm performance. This relationship is described by what is called the agency cost theory [
43] (p. 372). The idea of agency relationships emphasizes that managers, stockholders, bondholders and other parties act in their own self-interest and that costly conflicts may arise due to these self-interests [
39] (p. 74). From the agency theory perspective, strong corporate governance plays an important role in protecting shareholders in general and should therefore result in lower agency costs [
81]. To solve the agency problem, various governance mechanisms have been devised such as providing equity ownership and compensation to managers, monitoring using boards of directors/large shareholders, the use of debt financing, discipline via capital markets and the managerial labor market, the market for corporate control and so on [
37] (p. 135). With effective corporate governance mechanisms, the agency cost can be curtailed while greater firm performance is simultaneously achieved [
38] (p. 6).
The choice of how to supply capital to a firm is an important decision [
43] (p. 368). Hence, this research focused on the impact of capital structure on a company’s performance; more precisely, the effect of the leverage on the estimated efficiency of companies was examined in order to verify the predictions of the theory of agency costs. According to the theory of agency costs, debt can represent an important mechanism of controlling the opportunistic behavior of managers, which encourages and/or constrains managers to act in accordance with owners’ interests rather than their own. According to the premise of agency costs, a higher level of leverage reduces the agency costs of equity caused by the conflict of interest between owners and managers and contributes to increasing the efficiency of companies. Since agency costs of equity inevitably arise as a consequence of the separation of ownership and management (control), the goal is to minimize these costs. Bearing in mind that agency costs are real like all other costs, a significant level of these costs leads to resource misallocation and the loss of potential output, which leads to a lower level of efficiency compared to companies that have minimized these costs.
The results of this research confirmed that a higher level of leverage represents a significant mechanism for improving the efficiency of companies. The existence of debt in a company’s capital structure motivates company managers to efficiently use the company’s resources since debt creates an obligation to return, and failure to fulfill these obligations can result in bankruptcy, which also causes managers to lose their position, power and employment. However, bearing in mind that very high levels of debt in a company’s capital structure generate another type of agency costs, i.e., agency costs of debt, which arise due to conflicts of interest between a company’s owners and creditors, the expected effect of a very high level of leverage on the efficiency of companies was examined. The research results showed that the effect of leverage on a company’s efficiency is non-linear, that is, it is expected that a sufficiently high level of leverage will negatively affect the company’s efficiency. The research results indicate that the use of debt is important for improving the efficiency of companies in mature industries but that its application requires caution since at high levels of leverage the disciplining effect of debt is not sustainable. High levels of leverage lead to the risk of default and increase the probability of bankruptcy and thus the growth of expected bankruptcy costs; on the other hand, it significantly affects the limitation of the investment activities of the company, which negatively affects the growth and competitiveness of the company. Regarding o other variables, the expected positive and significant impact on efficiency in all models was identified for firm size and asset tangibility. The identified positive impact of size on company efficiency confirms the theoretical views that large companies take advantage of the economy of large scale [
63] and better coordinate their resources [
61]. Tangible assets are easily monitored and provide good collateral and therefore tend to mitigate agency conflict [
13].
The research results add to the empirical literature on agency cost theory by providing useful insights into how debt, as one of the internal mechanisms of corporate governance, can help mitigate agency costs and thereby contribute to improving company performance. Agency costs might be significantly higher in countries with weak legal systems and poor investor protection [
73]. Emerging markets are prone to managerial discretion to a greater extent compared to Anglo-American countries [
38] (p. 2). Leverage is considered an agency-mitigating mechanism as outsiders monitor the actions of managers with respect to efficient contracting [
38] (p. 4). Increase in leverage provides greater incentive for lenders to monitor managers’ actions and decisions more closely, reducing agency costs [
37] (p. 140). Given that shareholders of emerging market firms typically suffer from misaligned managerial incentives and ineffective legal protection, emerging markets provide an excellent laboratory for testing the potential of debt management [
75]. Confirmation of the agency costs hypothesis shows that the choice of capital structure for a firm is an important decision that can have practical implications for composing the capital structure in emerging markets. It can be concluded that in the context of the companies analyzed, debt financing can act as an internal governance mechanism in constraining managers’ misuse of resources, thereby reducing agency costs and contributing to the improvement of company performance. The aforementioned conclusions can be very significant guidelines for the composition of the capital structure of companies operating in mature industries and contribute to improving the efficiency of a company by making adequate decisions about its capital structure.
In most studies on the relationship between capital structure and company performance, accounting indicators calculated based on financial statements (ROA, ROE), followed by market performance measures (EPSs) and Tobin’s Q indicator, which combines accounting and market values, were applied. Only a few empirical studies used efficiency as a performance indicator [
12,
13,
43,
44,
45]. Therefore, bearing in mind the advantage of an efficiency analysis as a performance indicator compared to traditional financial indicators, the results of this research can be considered significant.
One of the limitations of this conducted empirical research relates to data on the ownership structure of joint stock companies in the Republic of Serbia. Since the data on the ownership share of the largest shareholder, which was used for the ownership concentration variable, were only available for the last year of the research period (2020), it potentially limited the achievement of significant research results regarding the effect of ownership concentration on the efficiency of companies since the mentioned variable did not prove to be significant in any model. However, similar limitations were identified in other research studies [
12], and the reason why the mentioned variable, with a significant limitation, was retained in this research is that the ownership structures of companies in developing countries mostly show stability over time. Another limitation of this research is related to the research sample. The research sample was defined based on the theoretical framework of the research, and in order to represent an adequate laboratory for testing the developed research hypotheses, it was necessary to fulfill various requirements that arose from the defined research context. It was necessary for the companies to be in the form of joint-stock companies since the relationship between the stockholders and the manager of a corporation fit the definition of a pure agency relationship [
6] (p. 309). Also, bearing in mind that the period of analysis was very long (2006–2020), during the observed period, the values of the size criterion changed significantly for some companies, i.e., companies moved into different categories according to this criterion, but during this period in the Republic of Serbia, the legally defined criteria for determining the size of companies, as well as their reference values [
60], also changed. Therefore, although the agency costs of the separation of ownership and management are more pronounced in large, organizationally complex companies, and bearing in mind that some authors point out that agency problems can also occur in small- and medium-sized companies that employ professional managers [
82,
83], the sample was not limited by the size of the companies, but size was used as one of the control variables in the model. On the other hand, bearing in mind that an efficiency analysis was used to assess the performance of companies, it was necessary that the sample comprise companies operating in the same conditions and applying predominantly similar production technologies. Therefore, the empirical research focused on traditional, mature areas of the manufacturing industry. It would be significant to conduct similar research on companies operating in other growing areas of the industry since such companies, due to greater opportunities for growth, have different capital requirements than firms in mature industries. Therefore, it would be important to test whether the disciplining effect of debt, which was confirmed for companies operating in mature areas of the manufacturing industry, was also significant for companies operating in growing areas, such as the areas of computer, electronic and optical product production.
In addition to the research sample which, due to the observed context of the research, was limited to a specific sample of companies that met all the defined criteria, one of the limitations of this research also refers to the applied indicator that expresses the capital structure of the analyzed companies. This research used total leverage as a proxy for capital structure. Bearing in mind that companies in developing countries have very low long-term leverage, in contrast to short-term leverage, which is quite high [
53,
73], in addition to testing the disciplinary effect of debt and the impact on the performance of companies in other areas, it would be very important in future research to separately examine the impacts of short-term leverage and long-term leverage on company performance. Using long-term leverage and short-term leverage as a proxy for capital structure could potentially provide different results and conclusions about the impact of capital structure on company performance, which would certainly cause different theoretical and practical implications; therefore, it would be very important to investigate the proposed relationships in future research.