Hidden Reserves as an Alternative Channel of Firm Finance in a Major Developing Economy

Transcription

1. Hidden Reserves as an Alternative Channel of Firm Finance in a Major Developing Economy İbrahim YARBA December 2019 Working Paper No: 19/36
2. © Central Bank of the Republic of Turkey 2019 Address: Central Bank of the Republic of Turkey Head Office Structural Economic Research Department Hacı Bayram Mh. İstiklal Caddesi No: 10 Ulus, 06050 Ankara, Turkey Phone: +90 312 507 80 04 Facsimile: +90 312 507 78 96 The views expressed in this working paper are those of the author(s) and do not necessarily represent the official views of the Central Bank of the Republic of Turkey.
3. Hidden Reserves as an Alternative Channel of Firm Finance in a Major Developing Economy İbrahim Yarba* “Many Turkish households and corporates have some hidden reserves that are utilized during time of stress. This is one of the reasons why companies are still showing resilience…” (Standard & Poor’s, July 17, 2017) Abstract This study analyses the argument that whether Turkish non-financial firms utilize any informal source of alternative funding during economic uncertainties over the last decade. This study is the first to explore the issue and provide some insights regarding how small and mediumsized enterprises do react to the financial constraint problem in such an economic environment. Both trend analysis and empirical panel model estimations provide supporting evidence that Turkish non-financial firms have some reserves (e.g., owners’, relatives’ and/or friends’ personal wealth) that are utilized during the times of persistent stress and tightening of macroprudential policies. Most strikingly, this is the case for only small and medium-sized enterprises but not for large firms. Özet Bu çalışma, Türkiye’deki finansal olmayan şirketlerin ekonomik belirsizliğin arttığı dönemlerde geleneksel finansman kanalları dışında alternatif bir finansman kullanıp kullanmadığını analiz etmektedir. İktisadi yazın söz konusu dönemlerde, özellikle küçük ve orta ölçekli firmaların finansal kısıtlarla karşı karşıya geldiğine ilişkin kanıtlar sunmakta olup, bu çalışma firmaların bu sorun karşısında nasıl hareket ettiğine yönelik firma düzeyindeki ilk çalışma özelliğini taşımaktadır. Gerek trend analizleri gerekse de dinamik panel modelinin sonuçları, belirsizliklerin sürekli olarak arttığı ve makro ihtiyati politikaların sıkılaştırıldığı dönemlerde reel sektör firmalarının bilenen finansman kanalları dışında (firma sahiplerinin ya da yakınlarının kişisel mal varlıkları gibi) bazı kaynakları kullandıklarına yönelik iddiaları destekleyen bulgular sunmaktadır. Sonuçları ilginç yapan diğer bir bulgu ise, bu durumun büyük firmalar için değil sadece küçük ve orta ölçekli firmalar için geçerli olmasıdır. JEL classification codes: C23, D21, D81, G18, G32 Key words: Hidden reserves, alternative firm financing channels, macroprudential policy, persistence of uncertainty * Central Bank of the Republic of Turkey, Structural Economic Research Department, İstiklal Cad. No:10, 06050, Ulus, Ankara, Turkey. E-mail: ibrahim.yarba@tcmb.gov.tr 1
4. Non-technical Summary In recent years , Small and Medium-Sized Enterprises (SMEs) have received much attention owing to their significant contributions to economies of both developed and emerging countries. In studying the SME finance, most of the existing research focuses only on the development of markets and banks. However, the recent financial turmoils have brought attention to the concerns related to firms’ access to traditional bank lending and market funding, which has been well documented for the case of SMEs in the literature. This reveals the importance of the behavior of SMEs and usage of alternative financing channels during such economic conditions. However, the issue has rarely been discussed in the literature and evidence is much more limited for emerging economies. In order to provide further evidence to shed some light on this issue for emerging markets, we examine the case of Turkey, one of the most important transition economies, by utilizing a confidential and comprehensive firmlevel data over the last decade. In particular, we analyse the argument that whether Turkish non-financial firms utilize any informal source of alternative funding during economic uncertainties and financial turmoils over the last decade. Conducting trend analyses and dynamic panel models, we provide some insights regarding how SMEs do react to the financial constraint problem in such an economic environment evidenced in the prior studies. We provide supporting evidence that Turkish nonfinancial firms have some reserves (e.g., owners’, relatives’ and/or friends’ personal wealth) that are utilized during the times of persistent stress and tightening of macroprudential policies. Most strikingly, this is the case for only small and medium-sized enterprises but not for large firms. Anecdotal evidence provided by certified public accountants is also in line with this argument. Findings of this study also brings additional insight to the research on alternative financing and the findings of previous research regarding the financial constraints on SMEs. OECD (2015) argue that even though bank financing is important for the SME sector, it is necessary to broaden the range of financing instruments available to SMEs, in order to enable them to continue to play their crucial role in the economy. In Turkey, SMEs’ dominant source of external finance is bank lending, and external financing alternative to straight bank debt is quite limited. However, as in many emerging countries, bank lending is highly cyclical and vulnerable to financial and economic conditions, and equity and bond markets are only accessible to large firms. In that sense, results of this study shed light on the importance of understanding the behaviour and coping mechanisms of SMEs and developing appropriate policies to improve the financial deepening and broaden the financing instruments available to SMEs as alternatives to the straight bank debt. 2
5. 1 . Introduction In recent years, Small and Medium-Sized Enterprises (SMEs) have received much attention owing to their significant contributions to economies of both developed and emerging countries. In studying the SME finance, most of the existing research focuses only on the development of markets and banks. However, the recent financial turmoils have brought attention to the concerns related to firms’ access to traditional bank lending and market funding, which has been well documented for the case of SMEs in the literature. This reveals the importance of the behavior of SMEs and usage of alternative financing channels during such economic conditions. However, the issue has rarely been discussed in the literature and evidence is much more limited for emerging economies. In order to provide further evidence to shed some light on this issue for emerging markets, we aim to analyse the case of Turkey, one of the most important transition economies, by utilizing a confidential and comprehensive firm-level data over the last decade. In many emerging countries as in Turkey, bank lending is highly cyclical and vulnerable to financial and economic conditions while equity and bond markets are only accessible to large firms. This suggests that SMEs must sometimes make use of alternative forms of finance in these countries during financial turmoils and economic uncertainties (Allen et al. 2005, 2012a). Trade credit, informal lending and loans from family and friends have been discussed in the literature as the most important sources of alternative finance for bank credit. Theoretical research in this area (e.g., Burkart and Ellingsen, 2004; Petersen and Rajan, 1994, 1995) suggests that firms tend to use trade credit to complement bank lending when financial conditions tighten and liquidity relatively dries up. In line with this theoretical argument, previous empirical research (e.g., McGuinness et al., 2018; Casey and O'Toole, 2014; CarboValverde et al., 2016; Ferrando and Mulier, 2013; Garcia-Appendini and Montoriol-Garriga, 2013) has provided ample evidence in support for the view that trade credit provides a useful buffer for financially constrained firms. However, there has been little emphasis in the literature on alternative financing channels other than trade credit, and there is no study regarding the issue for Turkey. 3
6. SMEs have crucial role in Turkish economy over the last decade1 . However, credit constraints and difficulty in accessing capital have been considered as the two major problems faced by SMEs in Turkey as in many other emerging countries. In their recent studies, Mutluer Kurul and Tiryaki (2014, 2016) show that the credit constraint problem is more severe after the financial crisis, especially for small firms in Turkey. In line with this finding, Yarba and Guner (2019b) show that Turkish SMEs’ financial debt ratios, but not that of large firms, decrease when uncertainty of economic environment increases persistently and when macroprudential policies (MPPs) are tightened. In the last decade, domestic and geopolitical uncertainties have played vital roles in Turkey. Accordingly, MPPs have been extensively used to increase the financial stability.2 However, how SMEs do react to the financial constraint problem in such an economic environment evidenced in the prior studies remains to be puzzling. This study is the first one to explore the issue and provide some insights. In first place, we do not find any significant evidence regarding the usage of trade credit, which has been mentioned as the most important alternative financial channel in the literature. Thus, in this study our particular focus is the argument that whether Turkish non-financial firms utilize any informal source of alternative funding other than trade credit. In that sense this paper brings additional insight to the research on alternative financing by Allen et al. (2005, 2012a, b). They argue that while traditional financing channels, including financial markets and banks, provide significant sources of funds for firms, alternative financing channels provide an equally important source of funds in fast-growing emerging countries, especially for SMEs. They show that non-state, non-listed firms in China and India rely more on alternative financing channels such as funds from family and friends in order to finance activity. Accordingly, in their “Banking Industry Country Risk Assessment” report, Standard & Poor’s (S&P) argues that many Turkish households and corporates have some hidden reserves that are utilized during times of stress. They claim that this is one of the reasons why Turkish companies are still showing resilience in an uncertain and volatile economic environment of the country. If that is the case, in accordance with the usage of their hidden reserves (e.g., their personal, relatives’ and/or friends’ personal wealth), some fluctuations are expected in balance sheet components of these firms, namely owners’ equity and/or non-financial liabilities. Examining According to most recent report of Turkish Statistical Institute, in Turkey, SMEs’ share is 73.5% of total employment, 62% of total sales, 55% of total investments, and 53.5% of total value added. 2 See Kara (2016) for the details of the implementation of MPPs in Turkey. 1 4
7. trends in balance sheet components of the sample firms in detail , results reveal that only other non-financial liability component in the balance sheets of the SMEs, but not that of large firms exhibits upward fluctuations during such economic conditions. This component mainly consists of amounts owed to partners and the miscellaneous items, which are neither financial nor trade debt. This suggests that SMEs tend to finance themselves by increasing their other non-financial liabilities, which we argue that these are owners’, relatives’ and/or friends’ personal wealth (hidden reserves) of these firms. Anecdotal evidence provided from certified public accountants is also consistent with this argument. Moreover, in order to provide formal evidence for this argument, we also conduct empirical panel models over the sample period. Results show that firms increase their other non-financial liability components when uncertainty is persistently increasing and when macroprudential policy tools are tightened by regulators. Most strikingly, this is the case for only SMEs but not large firms, which provide significant supporting evidence for the anecdotal evidence and those in trend analysis. The remainder of this paper is organized as follows. The dataset and measurements are explained in Section 2, and trend analyses are presented in Section 3. The empirical model and results are reported in Section 4. Finally, concluding remarks are presented in Section 5. 2. Data and Variables 2.1. Variables This section explains how the macroprudential policy, uncertainty and persistence of uncertainty indices and other variables used in the empirical analyses of this study are constructed. 2.1.1. Uncertainty Following Yarba and Guner (2019b), we create an index of uncertainty for Turkey (UNCI) by using financial variables related with uncertainty. Financial variables used to construct this index are Credit Default Spread (CDS), Bond Market Spread and implied volatilities in Foreign Exchange (FX) market. For bond market spread, the commonly used Emerging Market Bond Index spread (EMBI) for Turkey; for CDS, 5 Year Credit Default Spread in USD for Turkey which has the highest trading volume; for implied volatilities in FX market, 1 month and 1 year 5
8. implied volatilities of both EUR/TL and USD/TL are used. All data is obtained from Bloomberg on a daily basis for 2005-2017 period due to the data availability. Principal Component Analysis is used to create a daily index for uncertainty. Based on the results of this analysis one single factor is extracted. The eigenvalue of this factor is 5.06 and 84.25% variance of all the variables is explained by this factor, which is relatively high. Since the firm-level data of this study is annual, the average of daily UNCI values are calculated for each year in order to convert daily data into annual data. 2.1.2. Persistence of Uncertainty Yarba and Guner (2019b) argue that reactions of economic agents to uncertainty may depend on whether the uncertainty is perceived to be short-lived or persistent and therefore the persistence of uncertainty might be an appropriate factor that could be taken into account in analysing financial decisions of firms. They also provide empirical evidence supporting their arguments. In order to measure the persistence of uncertainty, they adopt the methodology used by Herrera et al. (2011) and Davis and Haltiwanger (1992). The process is as follow: