Building a Financial Constraint Index for Türkiye

Hatice Karasoy Can and Evren Erdogan Cosar

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: The aim of this paper is to construct an index of financial constraints for firms in Türkiye. Traditional indices such as the KZ index, the WW index and the HP index have been constructed for advanced economies such as the United States or European countries. In this study, we take advantage of the Investment Tendency Survey sent to firms by the Central Bank of the Republic of Türkiye to extract a real indicator of financial constraints based on managers' own evaluations of their firms. The survey question on the factors that stimulate investment decisions is evaluated as a true indicator of financial constraints, and then this response is predicted with various balance sheet indicators. In this way, we construct an index of financial constraints that is specific to firms operating in the Turkish economy. We find that financial constraints can be determined with seven fundamental variables: age of the firm, size, change in size, profitability, leverage, tangibles (tangible assets to total assets) and export share. We prove the validity of the index by showing that financially constrained firms identified by this index have real difficulties in accessing bank credit in the form of lower volumes, higher interest rates and shorter loan maturities. We then show that financial constraints have a dampening effect on the firm's net worth and investment both through its own effect and through the long-term borrowing channel. Moreover, the transmission of a macro-financial shock is persistently affected by the financial constraint status. Finally, the validity of the index applies to a larger sample of companies.

Keywords: Index of financial constraints; KZ index; Investment tendency; Turkish firms; Turkish economy (search for similar items in EconPapers)
JEL-codes: E44 E60 G30 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ara, nep-ban, nep-cfn and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:2306

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