The Determinants and Implications of Financial Asset Holdings of Non-Financial Firms in Turkey : An Emprical Investigation

This paper investigates the determinants and financial crowding out consequences of nonfinancial firms� holdings of financial assets (FA) including government bonds and securities (GS) in Turkey using the firm level data compiled by the Central Bank of the Republic of Turkey over the 1990-2004 period. The salient features of the Turkish financial system with financial dollarisation and short maturity of financial contracts allowed the corporate sector to remain relatively liquid in spite of high inflation persisting until very recently. Consistent with the presence of capital market imperfections and financial adaptation, the Turkish corporate sector�s transactions-cum-precautionary motive-led holdings of the FA as a financial buffer are found to be relatively high and persistent. Contrasting with the transactions-cum-precautionary motive based �economies of scale� argument of the trade-off theory, but reflecting a plausible argument that financial constraints decrease and the ability to allocate resources into financial and real investments increases with firm size, the holdings of FA and GS tend to increase with the firm size both for manufacturing industry and other non-financial firms. The empirical results based on the one-step robust GMM estimations of DPD models suggest that the FA and GS holdings of the corporate sector can be explained by firm-specific characteristics including profitability, leverage ratios, asset tangibility and size along with macroeconomic condition variables represented by uncertainty and real interest rates on GS. The results further suggest that the impacts of these variables significantly vary not only across manufacturing industry and other non-financial firms but also between the large, medium and small sized firms. Under macroeconomic instability leading to excessively high real rate of returns for financial assets, non-financial firms tend to hold FA and GS also for their speculative motive. Consequently, financial assets and real investments may become substitutes rather than complements leading the former to crowd out the latter. The empirical results from a conventional accelerator model of investment augmented with variables representing firms financing conditions and PSBR strongly support such a financial crowding out impact of FA holdings for large sized manufacturing industry firms. For the small and medium sized firms, the positive complementary impact of precautionary and the negative substitution impact of speculative FA holdings are found to offset each other. Consistent with the credit view of the balance sheet literature, real investments of bank-dependent firms decline with an increase in the PSBR potentially due to the fact that government domestic debt is heavily financed via banks, which in turn deteriorates the credit availability for the corporate sector. This provides a further support to the �expansionary fiscal contractions� literature. The sensitivity of investment to cash flow is found to reflect the firms� profitability and investment opportunities which are not fully conveyed by the fundamental Q rather than the degree of financial constraints. This paper also argues that the conventional pecking-order and trade-off theories of the capital structure literature may not be solely adequate in explaining the non-financial firms� behaviour as financial intermediaries in Turkey. This might be the case also the acceleration of the FA holdings of firms in many industrial countries during the last decade in spite of declining financial constraints due to deepening international financial integration. An alternative but not mutually exclusive approach may be treating firms as facing a choice between allocating their resources into financial and real investments. The results of this paper provide a strong support to such an approach and suggest that financial investments may be a substitute or complementary to real investment depending respectively on whether the speculative or transactions-cum-precautionary motive dominates.