İbrahim Yarba is a Deputy Executive Director at the CBRT.
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One of the key roles of a smoothly functioning financial system is to enable an effective distribution of resources across the corporate sector, thereby making them available for investments. The economic and financial literature provide strong evidence for the positive effect of developed financial systems in particular, on accumulation of human and physical capital, economic growth, income inequalities, and economic stability. Does, then, financial development constrain Turkish firms? Is there room for financial deepening? Study findings of Yarba and Güner (2019), who scrutinized credit dynamics of non-financial firms in Turkey, give some hints to answer these questions. This study, analyzing a sample period of twenty years from 1996 to 2015, uses the firm-level data set from the CBRT’s Company Accounts.1
Results obtained by using the dynamic panel method reveal that the changes of corporate leverage in Turkey are determined not only by the firm and respective sector-specific variables such as profitability and fluctuations of operating income, but also by cyclical and structural factors. For instance, regarding the financial indebtedness ratio of Turkish firms, the higher the financial development, the lower the short-term and higher the long-term financial debt ratios. This significant positive effect on the long-term financial debt ratio stands out as the strongest effect among all other explanatory variables. Besides, the increase in the public debt ratio has had a negative effect on corporate debt ratios (crowding out effect). Do, then, these results vary according to whether a firm is publicly traded and/or to the size?
Is there a differentiation for publicly traded firms?
Detailed analyses to answer this question indicate that the positive effect of financial development and the negative effect of government leverage are more pronounced for private firms than they are for public firms. Likewise, the negative effect of fluctuations in firms’ operating incomes is only applicable to private firms. These findings support the important function of the financial system in mitigating frictions underlined in the financial literature such as asymmetric information and in easing the access to capital. In Turkey, despite the noticeable progress posted in financial development after 2001, there is still significant room for improvement in financial development. For instance, the number of publicly traded firms and their total market values as a ratio to GDP are low compared to those in both advanced economies and peer emerging economies. Therefore, study findings call attention to the policies geared towards deepening capital markets in Turkey.
How do SMEs differ from large corporates?
Improvement in financial development has a positive effect on long-term financial borrowings of both large firms and SMEs. However, this effect is stronger for SMEs. Another striking finding is that SMEs suffer much more than large firms in crowding out periods of government leverage while both SMEs and large firms benefit in crowding in periods. Additionally, the negative effect of fluctuations in corporate operating incomes is valid only for SMEs.
These findings support the findings of previous research regarding the financial constraints on Turkish SMEs, which limit their potential in the economy. SMEs, which are critical to the country’s investment, innovation, employment and economic growth, are mostly reliant on bank loans as a source of finance in Turkey. Alternative sources of finance, on the other hand, are quite limited. Although most of the time bank loans provide a great deal of finance for SMEs, they are not necessarily the most appropriate instrument to fund SMEs’ long-term investments in particular. Thus, it is necessary to broaden the range of financing instruments available to SMEs, in order for them to continue to play their role in investment, growth, innovation and employment (OECD, 2015). In sum, these findings reveal the importance of policies that aim to broaden the funding options such as deepening of capital markets, and venture and risk capital.
 For details see Yarba and Güner (2019).
OECD (2015). New approaches to SME and entrepreneurship finance: Broadening the range of instruments. OECD Publishing, Paris.
Yarba, İ., & Güner, Z. G. (2019). Leverage dynamics: Do financial development and government leverage matter? Evidence from a major developing economy. Empirical Economics