This study analyses leverage dynamics of Turkish non-financial firms over the last 20 years using a confidential and unique firm-level dataset. Results of dynamic panel estimations reveal that financial development fosters corporate leverage while government indebtedness inhibits it. Both impacts are more pronounced for private firms rather than public firms. Besides, even though improvements in financial development foster long-term debt usage for both SMEs and large firms, this impact seems stronger for SMEs. Conspicuously, results reveal 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. Moreover, higher business risk hinders corporate leverage of private firms and SMEs, which is not the case for either large firms or public firms. Results are robust to alternative firm size classification schemes and alternative model specifications.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
Please see the CBRT’s web site for detailed information on the database including data collection process. (http://www.tcmb.gov.tr/wps/wcm/connect/tcmb+en/tcmb+en/main+menu/statistics/real+sector+statistics/company+accounts).
Soytaş and Küçükkaya (2011) construct a financial development index for Turkey for the period 1991 to 2005 by using Principal Component Analysis. Using the same methodology, we reconstructed their index for the period 1991 to 2015. For robustness, this reconstructed index is also used as an alternative measure of financial development in addition to the index created by Svirydzenka (2016). Since the results obtained by using this alternative index are in line with those in Table 5, they are not reported to conserve space but available from authors upon request.
For robustness, we re-estimate all alternative specifications of the model excluding industry median leverage. Results are in line with those reported in all tables that have industry median leverage as an explanatory variable. In addition to be a proxy for target leverage, industry median leverage is also argued to be a proxy for some omitted common industry factors (Flannery and Rangan, 2006; Frank and Goyal, 2008, 2009); hence, we report results of the model including industry median leverage in line with the capital structure literature. Alternatively, we also include industry x year fixed effects in the model in order to control any possible omitted industry factors (time-variant unobservable industry factors). However, time-variant variables (all macroeconomic and economic environment factors) are dropped from the model because of collinearity. Rest of the variables, namely all firm-specific variables, remain robust. To converse space, they are not reported in the paper but available upon request from authors.
For robustness, another classification scheme based on firm sales is also used. In this approach, firms are divided into quartiles by the value of their net sales, and a firm is classified as “large” if it is in the highest net sales quartile and as an “SME” otherwise. Since the results based on this classification scheme are qualitatively the same as those based on number of employees, they are not reported in the paper but available upon request from authors.
All the models for short-term and long-term leverages and different firm sizes based on net sales, and based on number of employees are re-estimated for the subperiod 2002–2015 as well. Results are in line with those for the subperiod 2003–2015. To conserve space, they are not reported in the study; however, they are available from authors upon request.
There is not a significant variation in financial development index during the first subperiod; thus, coefficient of this variable cannot be estimated.
Anderson TW, Hsiao C (1981) Estimation of dynamic models with error components. J Am Stat Assoc 76:598–606
Anderson TW, Hsiao C (1982) Formulation and estimation of dynamic models using panel data. J Econom 18:47–82
Antoniou A, Guney Y, Paudyal K (2008) The determinants of capital structure: capital market-oriented versus bank-oriented institutions. J Financ Quant Anal 43(1):59–92
Arellano M, Bond SR (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:227–297
Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error components models. J Econom 68:29–51
Aydın Hİ, Kaplan C, Kesriyeli M, Özmen E, Yalçın C, Yiğit S (2006) Corporate sector financial structure in turkey: a descriptive analysis. Central Bank of the Republic of Turkey working paper 06/07
Baltagi BH (2008) Econometric analysis of panel data. Wiley, West Sussex
Bancel F, Mittoo U (2004) Cross-country determinants of capital structure choice: a survey of European firms. Financ Manag 33:103–132
Bayless M, Chaplinsky S (1991) Expectations of security type and the information content of debt and equity offers. J Financ Intermed 1:195–214
Blundell RW, Bond SR (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–143
Bond S (2002) Dynamic panel data models: a guide to micro data methods and practice, practice. Port Econ J 1:141–162
Booth L, Aivazian V, Demirgüç-Kunt A, Maksimovic V (2001) Capital structures in developing countries. J Finance 56(1):87–130
Chakraborty I (2010) Capital structure in an emerging stock market: the case of India. Res Int Bus Finance 24:295–314
Chava S, Roberts M (2008) How does financing impact investment? The role of debt covenants. J Finance 63:2085–2121
Choe H, Masulis RW, Nanda V (1993) Common stock offerings across the business cycle. J Empir Finance 1:3–31
Cilasun SM, Gönenç R, Özmen MU, Samancıoğlu MZ, Yılmaz F, Ziemann V (2019) Upgrading business investment in Turkey. OECD Economics Department working papers, no. 1532, OECD Publishing, Paris
Correa CA, Basso LFC, Nakamura WT (2007) What determines the capital structure of the largest Brazilian firms? An empirical analysis using panel data. J Int Finance Econ 5(1):27
De Jong A, Kabir R, Nguyen TT (2008) Capital structure around the world: the roles of firm and country specific determinants. J Bank Finance 32(9):1954–1969
Demirgüç-Kunt A, Maksimovic V (1999) Institutions, financial markets, and firm debt maturity. J Financ Econ 54:295–336
Diamond D (1984) Financial intermediation and delegated monitoring. Rev Econ Stud 51:393–414
Espinosa CM, Maquieira CV, Vieito JP, Gonzalez MA (2012) Capital structures in developing economies: the Latin American case. Investig Econ 71(282)
Fan J, Titman S, Twite G (2012) An international comparison of capital structure and debt maturity choices. J Financ Quant Anal 47(1):23–56
Flannery M, Hankins KW (2013) Estimating dynamic panel models in corporate finance. J Corp Finance 19:1–19
Flannery M, Rangan K (2006) Partial adjustment towards target capital structures. J Financ Econ 79:469–506
Frank M, Goyal V (2008) Trade-off and pecking order theories of debt. In: Eckbo E (ed) Handbook of corporate finance, vol 2. Elsevier, North Holland, pp 135–202
Frank M, Goyal V (2009) Capital structure decisions: which factors are reliably important? Financ Manag 38:1–37
Friedman B (1986) Implications of government deficits for interest rates, equity returns, and corporate financing. In: Friedman B (ed) Financing corporate capital formation. University of Chicago Press, Chicago, pp 67–90
Graham JR, Harvey CR (2001) The theory and practice of corporate finance: evidence from the field. J Financ Econ 60:187–243
Graham JR, Leary MT, Roberts MR (2015) A century of capital structure: the leveraging of corporate America. J Financ Econ 118:658–683
Güner A (2016) The determinants of capital structure decisions: new evidence from Turkish companies. Procedia Econ Finance 38:84–89
Hahn J, Hausman J, Kuersteiner G (2007) Long difference instrumental variables estimation for dynamic panel models with fixed effects. J Econom 140:574–617
Hanousek J, Shamshur A (2011) A stubborn persistence: is the stability of leverage ratios determined by the stability of the economy? J Corp Finance 17:1360–1376
Harris M, Raviv A (1991) The theory of capital structure. J Finance 46(1):297–355
Hovakimian A, Opler T, Titman S (2001) The debt equity choice. J Financ Quant Anal 36:1–24
Huang G, Song FM (2006) The determinants of capital structure: evidence from China. China Econ Rev 17(1):14–36
Hull RM (1999) Leverage ratios, industry norms, and stock price reaction: an empirical investigation of stock-for-debt transactions. Financ Manag 28:32–45
IMF (2002) Turkey negotiations back on track. IMF Survey. Washington DC 31:392
IMF (2009) From recession to recovery: how soon and how strong? Chapter 3 in World Economic Outlook (WEO) Crisis and Recovery, Washington, DC
Jensen M (1986) Agency costs of free cash flow, corporate finance and takeovers. Am Econ Rev 76:323–339
Jensen M, Meckling W (1976) A theory of the firm: managerial behavior, agency costs, and ownership structure. J Financ Econ 3:305–360
Judson RA, Owen AL (1999) Estimating dynamic panel data models: a guide for macroeconomists. Econ Lett 65:9–15
Karaşahin R, Küçüksaraç D (2016) Revisiting capital structure of non-financial public firms in Turkey. Central Bank of the Republic of Turkey working paper 16/09
Kayhan A, Titman S (2007) Firms’ histories and their capital structures. J Financ Econ 83:1–32
Köksal B, Orman C (2015) Determinants of capital structure: evidence from a major developing economy. Small Bus Econ 44:255–282
Korajczyk RA, Lucas D, McDonald R (1990) Understanding stock price behavior around the time of equity issues. In: Glenn Hubbard R (ed) Asymmetric information, corporate finance, and investment. University of Chicago Press, Chicago
Kurul DM, Tiryaki ST (2016) How credit-constrained are firms in Turkey? A survey-based analysis. Appl Econ Lett 23(6):420–423
Leland H, Pyle D (1977) Informational asymmetries, financial structure, and financial intermediation. J Finance 32:371–387
Maquieira C, Olavarrieta S, Zutta P (2007) Determinantes de la estructura de financiación. Evidencia empírica para Chile. El Trimestre Económico 293:161–194
McDonald R (1983) Government debt and private leverage: an extension of the Miller theorem. J Public Econ 22:303–325
Miller M (1977) Debt and taxes. J Finance 32:261–275
Modigliani F, Miller MH (1958) The cost of capital, corporation finance and the theory of investment. Am Econ Rev 48(3):261–297
Modigliani F, Miller MH (1963) Corporate income taxes and the cost of capital: a correction. Am Econ Rev 53(3):443–453
Myers SC (1977) Determinants of corporate borrowing. J Financ Econ 5:147–175
Myers SC (1984) The capital structure puzzle. J Finance 39:575–592
Myers SC (2001) Capital structure. J Econ Perspect 15(2):81–102
Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J Financ Econ 13(2):187–221
Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49:1417–1426
OECD (2015) New approaches to SME and entrepreneurship finance: Broadening the range of instruments. OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264240957-en
Okuyan HA, Taşçı HM (2010a) Determinants of capital structure: an analysis on the largest 1,000 industrial firms in Turkey. J BRSA Bank Financ Mark 4(1):105–120
Okuyan HA, Taşçı HM (2010b) Determinants of capital structure: evidence from real sector firms listed in ISE. Ekonomik Yaklaşım 21(6):55–72
Oztekin O, Flannery MJ (2012) Institutional determinants of capital structure adjustment speeds. J Financ Econ 103:88–112
Pandey IM (2004) Capital structure, profitability and market structure: evidence from Malaysia. Asia Pac J Econ Bus 8(2):78–91
Psillaki M, Daskalakis D (2009) Are the determinants of capital structure country or firm specific? Small Bus Econ 33(3):319–333
Qureshi MA (2009) Does pecking order theory explain leverage behavior in Pakistan? Appl Financ Econ 19(17):1365–1370
Rajan RG, Zingales L (1995) What do we know about capital structure? Some evidence from international data. J Finance 50(5):1421–1460
Reinhart C, Rogoff K (2009) This time is different: eight centuries of financial folly. Princeton University Press, Princeton
Sayılgan G, Karabacak H, Küçükkocaoğlu G (2006) The firm-specific determinants of corporate capital structure: evidence from Turkish panel data. Invest Manag Financ Innov 3(3):125–139
Schmukler SL, Vesperoni E (2006) Financial globalization and debt maturity in emerging economies. J Dev Econ 79(1):183–207
Sheikh NA, Wang Z (2011) Determinants of capital structure: an empirical study of firms in manufacturing industry of Pakistan. Manag Finance 37(2):117–133
Soytaş U, Küçükkaya E (2011) Economic growth and financial development in Turkey: new evidence. Appl Econ Lett 18(6):595–600
Strebulaev IA (2007) Do tests of capital structure theory mean what they say? J Finance 62:1747–1787
Svirydzenka K (2016) Introducing a New Broad-based Index of Financial Development. IMF working paper 16/5
Taggart R (1985) Secular patterns in corporate finance. In: Friedman B (ed) Corporate capital structures in the United States. University of Chicago Press, Chicago, pp 13–80
Titman S, Wessels R (1988) The determinants of capital structure choice. J Finance 43(1):1–19
Wald JK (1999) How firm characteristics affect capital structure: an international comparison. J Financ Res 22(2):161–187
Welch I (2004) Capital structure and stock returns. J Polit Econ 112:106–131
World Bank (2011) Turkey: improving conditions for SME growth, finance and innovation, private and financial sector report, Washington, DC
Yarba I, Güner ZN (2019) Macroprudential policies, persistence of uncertainty and leverage dynamics: evidence from a major developing economy. Central Bank of the Republic of Turkey working paper 19/10
Yıldız ME, Yalama A, Sevil G (2009) Testing capital structure theory using panel data regression analysis: an empirical evidence from Istanbul Stock Exchange manufacturing firms. İktisat İşletme ve Finans 24(278):25–45
The views expressed in this study are those of the authors and do not necessarily represent the official views of the Central Bank of the Republic of Turkey.
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
About this article
Cite this article
Yarba, İ., Güner, Z.N. Leverage dynamics: Do financial development and government leverage matter? Evidence from a major developing economy. Empir Econ 59, 2473–2507 (2020). https://doi.org/10.1007/s00181-019-01705-5
- Leverage dynamics
- Financial development
- Government leverage
- Capital structure
- Dynamic panel regression