Skip to main content
SpringerLink
Log in

Leverage dynamics: Do financial development and government leverage matter? Evidence from a major developing economy

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

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, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. See, for example, Booth et al. (2001), Bancel and Mittoo (2004), Demirguc-Kunt and Maksimovic (1999), Antoniou et al.(2008), De Jong et al. (2008), Psillaki and Daskalakis (2009), Hanousek and Shamshur (2011), Oztekin and Flannery (2012) and Fan et al. (2012).

  2. See, for example, Aydın et al. (2006), Sayılgan et al. (2006), Yıldız et al. (2009), Okuyan and Taşçı (2010a), Okuyan and Taşçı (2010b), Köksal and Orman (2015), Güner (2016) and Karaşahin and Küçüksaraç (2016).

  3. Another commonly used macroeconomic control variable, namely corporate tax rate, did not exhibit significant variation in Turkey during our sample period, especially after 2000. Besides, too many tax advantages as well as unprecedented tax amnesties are given to various sectors and these make measurement impossible. Hence, tax incentive is not incorporated into models as an economic environment factor.

  4. 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).

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. There is not a significant variation in financial development index during the first subperiod; thus, coefficient of this variable cannot be estimated.

  10. To conserve space, these results are not reported in the paper. However, they are available from authors upon request.

References

  • Anderson TW, Hsiao C (1981) Estimation of dynamic models with error components. J Am Stat Assoc 76:598–606

    Google Scholar 

  • Anderson TW, Hsiao C (1982) Formulation and estimation of dynamic models using panel data. J Econom 18:47–82

    Google Scholar 

  • 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

    Google Scholar 

  • 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

    Google Scholar 

  • Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error components models. J Econom 68:29–51

    Google Scholar 

  • 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

    Google Scholar 

  • Bancel F, Mittoo U (2004) Cross-country determinants of capital structure choice: a survey of European firms. Financ Manag 33:103–132

    Google Scholar 

  • Bayless M, Chaplinsky S (1991) Expectations of security type and the information content of debt and equity offers. J Financ Intermed 1:195–214

    Google Scholar 

  • Blundell RW, Bond SR (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–143

    Google Scholar 

  • Bond S (2002) Dynamic panel data models: a guide to micro data methods and practice, practice. Port Econ J 1:141–162

    Google Scholar 

  • Booth L, Aivazian V, Demirgüç-Kunt A, Maksimovic V (2001) Capital structures in developing countries. J Finance 56(1):87–130

    Google Scholar 

  • Chakraborty I (2010) Capital structure in an emerging stock market: the case of India. Res Int Bus Finance 24:295–314

    Google Scholar 

  • Chava S, Roberts M (2008) How does financing impact investment? The role of debt covenants. J Finance 63:2085–2121

    Google Scholar 

  • Choe H, Masulis RW, Nanda V (1993) Common stock offerings across the business cycle. J Empir Finance 1:3–31

    Google Scholar 

  • 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

    Google Scholar 

  • 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

    Google Scholar 

  • Demirgüç-Kunt A, Maksimovic V (1999) Institutions, financial markets, and firm debt maturity. J Financ Econ 54:295–336

    Google Scholar 

  • Diamond D (1984) Financial intermediation and delegated monitoring. Rev Econ Stud 51:393–414

    Google Scholar 

  • 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

    Google Scholar 

  • Flannery M, Hankins KW (2013) Estimating dynamic panel models in corporate finance. J Corp Finance 19:1–19

    Google Scholar 

  • Flannery M, Rangan K (2006) Partial adjustment towards target capital structures. J Financ Econ 79:469–506

    Google Scholar 

  • 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

    Google Scholar 

  • Frank M, Goyal V (2009) Capital structure decisions: which factors are reliably important? Financ Manag 38:1–37

    Google Scholar 

  • 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

    Google Scholar 

  • Graham JR, Harvey CR (2001) The theory and practice of corporate finance: evidence from the field. J Financ Econ 60:187–243

    Google Scholar 

  • Graham JR, Leary MT, Roberts MR (2015) A century of capital structure: the leveraging of corporate America. J Financ Econ 118:658–683

    Google Scholar 

  • Güner A (2016) The determinants of capital structure decisions: new evidence from Turkish companies. Procedia Econ Finance 38:84–89

    Google Scholar 

  • Hahn J, Hausman J, Kuersteiner G (2007) Long difference instrumental variables estimation for dynamic panel models with fixed effects. J Econom 140:574–617

    Google Scholar 

  • 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

    Google Scholar 

  • Harris M, Raviv A (1991) The theory of capital structure. J Finance 46(1):297–355

    Google Scholar 

  • Hovakimian A, Opler T, Titman S (2001) The debt equity choice. J Financ Quant Anal 36:1–24

    Google Scholar 

  • Huang G, Song FM (2006) The determinants of capital structure: evidence from China. China Econ Rev 17(1):14–36

    Google Scholar 

  • Hull RM (1999) Leverage ratios, industry norms, and stock price reaction: an empirical investigation of stock-for-debt transactions. Financ Manag 28:32–45

    Google Scholar 

  • IMF (2002) Turkey negotiations back on track. IMF Survey. Washington DC 31:392

    Google Scholar 

  • 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

    Google Scholar 

  • Jensen M, Meckling W (1976) A theory of the firm: managerial behavior, agency costs, and ownership structure. J Financ Econ 3:305–360

    Google Scholar 

  • Judson RA, Owen AL (1999) Estimating dynamic panel data models: a guide for macroeconomists. Econ Lett 65:9–15

    Google Scholar 

  • 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

    Google Scholar 

  • Köksal B, Orman C (2015) Determinants of capital structure: evidence from a major developing economy. Small Bus Econ 44:255–282

    Google Scholar 

  • 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

    Google Scholar 

  • Leland H, Pyle D (1977) Informational asymmetries, financial structure, and financial intermediation. J Finance 32:371–387

    Google Scholar 

  • Maquieira C, Olavarrieta S, Zutta P (2007) Determinantes de la estructura de financiación. Evidencia empírica para Chile. El Trimestre Económico 293:161–194

    Google Scholar 

  • McDonald R (1983) Government debt and private leverage: an extension of the Miller theorem. J Public Econ 22:303–325

    Google Scholar 

  • Miller M (1977) Debt and taxes. J Finance 32:261–275

    Google Scholar 

  • Modigliani F, Miller MH (1958) The cost of capital, corporation finance and the theory of investment. Am Econ Rev 48(3):261–297

    Google Scholar 

  • Modigliani F, Miller MH (1963) Corporate income taxes and the cost of capital: a correction. Am Econ Rev 53(3):443–453

    Google Scholar 

  • Myers SC (1977) Determinants of corporate borrowing. J Financ Econ 5:147–175

    Google Scholar 

  • Myers SC (1984) The capital structure puzzle. J Finance 39:575–592

    Google Scholar 

  • Myers SC (2001) Capital structure. J Econ Perspect 15(2):81–102

    Google Scholar 

  • 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

    Google Scholar 

  • Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49:1417–1426

    Google Scholar 

  • 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

    Google Scholar 

  • Okuyan HA, Taşçı HM (2010b) Determinants of capital structure: evidence from real sector firms listed in ISE. Ekonomik Yaklaşım 21(6):55–72

    Google Scholar 

  • Oztekin O, Flannery MJ (2012) Institutional determinants of capital structure adjustment speeds. J Financ Econ 103:88–112

    Google Scholar 

  • Pandey IM (2004) Capital structure, profitability and market structure: evidence from Malaysia. Asia Pac J Econ Bus 8(2):78–91

    Google Scholar 

  • Psillaki M, Daskalakis D (2009) Are the determinants of capital structure country or firm specific? Small Bus Econ 33(3):319–333

    Google Scholar 

  • Qureshi MA (2009) Does pecking order theory explain leverage behavior in Pakistan? Appl Financ Econ 19(17):1365–1370

    Google Scholar 

  • Rajan RG, Zingales L (1995) What do we know about capital structure? Some evidence from international data. J Finance 50(5):1421–1460

    Google Scholar 

  • Reinhart C, Rogoff K (2009) This time is different: eight centuries of financial folly. Princeton University Press, Princeton

    Google Scholar 

  • 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

    Google Scholar 

  • Schmukler SL, Vesperoni E (2006) Financial globalization and debt maturity in emerging economies. J Dev Econ 79(1):183–207

    Google Scholar 

  • 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

    Google Scholar 

  • Soytaş U, Küçükkaya E (2011) Economic growth and financial development in Turkey: new evidence. Appl Econ Lett 18(6):595–600

    Google Scholar 

  • Strebulaev IA (2007) Do tests of capital structure theory mean what they say? J Finance 62:1747–1787

    Google Scholar 

  • 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

    Google Scholar 

  • Titman S, Wessels R (1988) The determinants of capital structure choice. J Finance 43(1):1–19

    Google Scholar 

  • Wald JK (1999) How firm characteristics affect capital structure: an international comparison. J Financ Res 22(2):161–187

    Google Scholar 

  • Welch I (2004) Capital structure and stock returns. J Polit Econ 112:106–131

    Google Scholar 

  • 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

    Google Scholar 

Download references

Acknowledgements

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.

Author information

Authors and Affiliations

  1. Structural Economic Research Department, Central Bank of the Republic of Turkey, Ankara, Turkey

    İbrahim Yarba

  2. Department of Business Administration, Middle East Technical University, Ankara, Turkey

    Z. Nuray Güner

Authors
  1. İbrahim Yarba
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Z. Nuray Güner
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to İbrahim Yarba.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

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

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-019-01705-5

Keywords

JEL Classification

Search

Navigation