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Role of financial market imperfections in firm level investment: Panel data evidence from Turkish corporations

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2003
Fıratlıoğlu Temir, Bahşayiş
Research analyzing the sensitivity of investment to internal funds using panel data has grown considerably in the last decade and most of the studies have provided results that internal funds substantially affect investment. Controlling for measurement errors, significant role of liquidity factors in investment equations are generally interpreted as evidence for liquidity constraints arising from various factors related to imperfect financial markets. In Turkey government securities crowd out private financial instruments and curtail the funds available for investments of firms. Moreover by presenting an attractive alternative, they exert additional pressure on real investments. This study analyzes the extent to which corporate investment in Turkey is sensitive to the availability of internal funds, given the crowding out in financial iiimarkets. Within the framework of three dynamic empirical models, namely an accelerator, an error correction and a «2-theory model, we provide evidence for the insufficiency of financial markets in providing funds for the real sector. The data set for our empirical study is constructed from the published annual financial statements of 196 listed Turkish companies for the years 1992-2000. Our results indicate that availibility of internal funds is a binding constraint for most of the firms, and even for the other firms we cannot conclude that access to financial markets lifts this constraint. Given this general binding nature of insufficient funds in the system, financial market inefficiencies related to informational problems have only a secondary role in firm behavior. The results also confirm a substitution effect of government securities on investment.