The Structure of SHORT-TERM Financing

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					                       THE STRUCTURE OF FINANCING
                     IN AN EMERGING MARKET -TURKEY


    The focus of this paper is to provide an informative study about the
structure of financing in Turkey, namely manufacturing companies for the years
between 1992 and 1998. The paper describes the capital structure based on
sources of financing and emphasizes the effect of revaluation fund as a
deceptive account misleading the understanding of the structure. Furthermore,
the study analyzes the relationship between the capital structuring and the
financial strength of the companies.

         The companies finance their operations through internal and external
sources. Management chooses one or a combination of these sources after
considering all available alternatives and evaluating their relevant costs and
terms.Traditional finance models suggest that companies select optimal
structures by trading off various costs and benefits.There is also evidence that
suggests that a company's history plays an important role in determining its
capital structure.High profitable companies often use their earnings to pay down
their liabilities to outside financing sources and as a result , they are usually less
levered than their less profitable counterparts , Titman and Wessels(1988).In
addition , companies tend to increase their capital stocks following an increase
in their stock prices,Masulis and Korwar(1986) and Asquith and Mullins(1986),
implying also that companies perform well to reduce their leverage.

        Bowen,Daley and Huber (1982), introduced a methodology for
analyzing the optimal capital structure.Their main hypothesis was that individual
firm's debt structures tend to converge to the industry mean over time.The
conclusion of their study was that firms exhibit a statistically significant
tendency to move toward their industry mean over both five and ten year time
periods.March (1982) concluded that the companies appear to make their choice
of financing instrument as though they had target levels in mind for both long

                                    Page 1                          18.06.2011
term ratios and the ratio of short term to total debt. Jalilvand and Harris (1984)
concluded that the firms' targets are a driving force one of several in the firms'
financial behavior.

        Myers' (1984) pecking order theory, on the other hand, provides
alternatives to the traditional target capital structure hypothesis.Myers stated that
the firm has no welldefined target debt-to-value ratio, and that firms in general
prefer internal financing first, external debt financing second, and external
equity financing third.The statement implies that if a company has little debt and
is in a strong financial position relative to the others in the same industry, it is
most likely to use internal equity for capital expansion projects. Also, a
company that uses debt financing for tax or other purposes, it is expected that it
will utilize common stock capital only as the last resort, due to the latter's
relatively higher costs and dilution of ownership issues.This implies that such a
company often moves its capital structure away from, rather than closer to, the
industry's mean.Ghosh (1999) aimed to analyze empirically whether firms do
converge toward the optimal capital structure, that is the industry mean, over
time or follow the pecking order theory as expounded by Myers. Ghosh used a
new set of data and improved the existing methodology. The results indicate that
both the optimal capital structure hypothesis and the pecking order hypothesis

        A number of authors have noted that the negative correlation between
profits and leverage is consistent with Donaldson's(1961) pecking order
description of how companies make their financing choices. Donaldson observes
that managers have a preference for funding new investment with retained
earnings over debt financing and prefer debt over equity financing.According to
his description, companies silently accumulate retained earnings, becoming less
levered when they are profitable, and accumulate debt, becoming more levered
when they are unprofitable. If companies are otherwise indifferent about their
capital structures, as suggested by Miller(1977), then they will not make future
capital structure choices which offset the effect of their earnings history. Shyam-
Sunder and Myers (1994) argue that this pecking order description provides a
better empirical description of capital structures than do traditional tradeoff
models. This pecking order description , as well as the evidence that companies
issue stock following stock price increases, has received considerable attention
because it appears to be in conflict with more traditional trade off theories. If

                                   Page 2                          18.06.2011
the costs and benefits of external financing, suggested by tradeoff theories are
economically significant, then companies better make financing choices that
offset the effect of history. In dynamic models like the one proposed by
Heinkel,Fischer and Zechner(1989), a company increases equity after its share
price declines and repurchases equity after its share prices increase to move
towards an optimal capital structure. However, existing researches mentioned
above show that companies do the opposite.

        There are other models that explain the rationale of the capital structures
of companies. One explanation ,consistent with traditional trade off theories, is
that capital structure change because the costs and benefits associated with debt
and equity financing change over time. Other explanations include the Lucas
and McDonald(1990) extension of the Myers and Majluf(1984) model and an
agency argument that is closely related to Zweibel's (1994) model.

        Taggart (1986) used pecking order theory in his study and found that the
pecking order hypothesis was more valid than the optimal capital structure
hypothesis. Clagegett,Jr.(1992) tested both hypotheses and found that
companies' long term debt to total assets ratio, for the most part, tended to move
toward the most recent previous industry mean within one year. In general, in
more companies with above industry average long term debt ratios are adjusted
toward the mean than with below-average ratios. Also,companies normally
behave in a manner consistent with the pecking order theory, however, some
industries may not adjust during periods of severe turmoil. Claggett,Jr.
concluded by stating that perhaps a hybrid theory between the optimal capital
structure theory and the pecking order theory is the next step in the ongoing
quest to explain how companies manage their capital structure.

        Wald (1999) examined the factors correlated with capital structure in
France, Germany, Japan, the UK, and the USA.He conducted a cross-country
comparison of five countries to test alternative theories of capital structure
within an international context.Wald verified many of the broad conclusions of
similar leverage across countries given by Rajan and Zingales (1995), but also
pointed out areas where differences may have existed.For although some
variables, such as those associated with moral hazard, tax deductions, research
and development, and profitability, had the expected signs and consistent across
countries, other variables, such as those associated with risk, growth, firm size,

                                   Page 3                         18.06.2011
and inventories showed different effects in different countries.The result of the
study indicated that institutions could be significant determinants of capital
structure, and that agency and monitoring problems,while existing in every
country, could create different outcomes.

                                  Page 4                        18.06.2011

        Internal sources generated by the company include the funds that are
directly injected to the business by the shareholders via capital stock and by
keeping the profit in the business via retained earnings or profit reserves. The
capital reserves also play a major role in creating an internal source.The capital
reserves are mainly generated through the revaluation of the tangible assets of
the company itself and of its participants and affiliates and surplus incurred in
the sales of shares at a price settled above the nominal price in capital stock
increases after the preemptive rights stage or during the going-public stage.

        The process of investment of the shareholder through capital stock
injections to a company that is registered in stock exchange market in Turkey
takes two to six months to be accomplished.This is basically a result of the
detailed procedures and regulations prescribed by the Trade Law and enforced
by the Capital Markets Board. Above all, initiating the process itself sometimes
requires more time than itself. This includes convincing the shareholders for the
necessity of capital increase, motivating and exciting them and arousing their
expectations about the company and promising the future that they're hoping
for and mostly competing with other possible investment tools available for the
shareholder in such an inflationary country.Although this process generates a
direct source for the company more direct than any other internal source , the
time and effort needed to obtain the source makes it a significant but not a
practical source of financing in Turkey.

       The utilization of the profit generated by the company through retained
earnings also requires the consent of the shareholders.Though less procedural
than capital stock investments , it is not a fresh cash injection to the company
and also requires nearly the same time and effort.

        The capital reserves generated with the revaluation of fixed assests is an
application in inflationary countries.The method for the revaluation of tangible
assets arises from with the necessity of presenting correct and current
information to the interested parties on financial statements.The cost principle
of the accounting theory does not enable the companies to reflect the effects of
price changes on fixed assests that are especially affected by inflation. In

                                  Page 5                         18.06.2011
Turkey, the companies registered in the stock market do employ this method.
Revaluation fund is a fictitious fund that increases the stockholders' equity.It is
not a means of financing the operations of a company but adjusting the
appearance on the financial statement. The capital reserve created through share
premiums is a direct source of financing for a company. It requires a longer time
than that required for increasing the capital stock.. The fund created with
revaluation of tangible assets and share premium is first recorded as capital
reserve then is either transferred to capital stock account or to profit account
with the consent of the shareholders anytime after its recording.

        External sources that are generated by the company can be both short-
term and long-term.The funds provided by the external parties can be grouped
according to the nature of the party providing them. The following grouping
considers the group of accounts that are presented on the financial statements as
financial loans provided by the financial institutions, payables to suppliers of
inventories and services, payables to shareholders, participations, affiliates,
payables to government and funds received from the customers.

                                   Page 6                         18.06.2011

        The banking system in financial institutions represents a major source of
funds for Turkish corporations.If the conditions are met, the company is able to
obtain a line of credit at the rate of interest announced by the bank. This
interest rate is a function of the riskiness of the company, expectations of the
bank , and the market conditions. The rate may differ among the banks and
above all, the same bank may offer different rates to different customers or even
may offer different rates to the same customer at different times.From the
company's point of view interest is the cost of short-term financing through
banks.The short-term financial expenses account on the Income Statement
reveals this cost relevant to the company. The level of the rate, terms, and
availability of the source basically effect the decision of the companies.

       The issuance of bills and bonds is not frequently employed in Turkey,
mainly because of the time and effort required for obtaining permission from
Capital Markets Board after being audited several times and meeting all the
underwriting requirements that all incur additional costs to the company.

        Another major source of fund is the suppliers that supply inventories and
services.They provide funds on credit,i.e. accounts payable or with promissory
notes,i.e. notes payable. Generally, the price offered by the supplier for his
product or service is higher than it would be if they were paid in cash at the
time of delivery. The supplier usually raises the price to cover the cost of this
credit .The riskiness of the customer and the existing rates of inflation effect the
amount of the markup. In this case, the change in the purchasing price is the
cost of short-term financing through suppliers for the company. Even in
transactions in which a promissory note is exchanged, the amount shown on the
note is the amount to be paid at maturity date.The cost of the credit or the
interest is mostly precalculated and added to the principal amount. This
common application of interest-included promissory notes in Turkey is mainly
due to frequent circulation of notes in the economy among the economic units
participating in the transactions.The wide spread use of interest-included notes is
not restricted to business-to-business transactions. They are extensively used in
the business-to-consumer trade, especially in the purchase of white goods,
furniture and automobiles. This type of promissory note makes it easier for both
the issuer and the holder to name the amount of debt or receivable without

                                   Page 7                         18.06.2011
going into further calculations. In some rare cases, the promissory note is issued
at principal amount specifing the interest rate to be employed. In such occasions,
the rate is the cost for the buyer. The increase in price or the interest rate
applied for the transaction is a function of riskiness of the customer,
expectations of the supplier, and the market conditions. If the company has
created the fund through interest-not-included promissory notes, the cost of
financing is considered in the short-term financial expenses account . But if the
note is the interest-included type, then the cost of financing is inventorized
with the product or treated as part of the expenses associated with the service
supplied to the company.Then it is not that easy to correlate the fund and its
cost to the company by referring only to the financial statements.

        The workers and the managers employed in the company also provide
funds to the company. In fact, they are supplying physical and mental effort to
the company at a price known as wages and salaries. The company may prefer
to pay wages and salaries later.In that case, workers and managers are supplying
funds to the company generally at no cost . The level and duration of the
wages and salaries payables created by the company in return may generate
unmeasurable and indirect costs to the company like decrease in motivation, in
productivity, and in the quantity of qualified staff that cannot be easily reflected
on the financial statements.

         The shareholders, the participants, and the affiliates may as well provide
sources to the company either on account or in the form of promissory notes
basis. In either case, the Turkish code specifies that the supplier of such funds,
if registered in the stock market, must charge at least the prevailing interest rate
in order to secure the rights of its own shareholders. If the terms of agreement
is settled with an interest-included promissory note , then it is hard to associate
the fund and its cost with reference to the financial statements. Otherwise the
short-term financial expenses account will include the cost of financing.

        The government is an important external party that provides funds to the
companies in Turkey by deferring the tax payments at some cost. The
government employs an interest rate for late payments of taxes that is included
in the short-term financial expenses. The government and the company may
settle for the payment of taxes due past in installments including the interest

                                   Page 8                         18.06.2011
incurred until then.The cost of financing through installments is hard to trace on
the financial statements like in the interest-included promissory note cases.
        The companies in Turkey also generate sources through their customers.
The customers may pay the cost of their order in total or in part in advance.
Availaibility of this source depends on the nature of the company,
competitiveness of the company ,the consent of the customer, the riskiness of
the company in fulfilling its promises, and the attractiveness of early payment
for the customer.Generally ,the companies lower the price for advance payments
if there is competition in the market.This way of financing has a cost that
appears as a decrease in gross sales than it would be otherwise.This makes it
rather impossible to correlate the fund and the cost. For the sake of
completeness, it must be noted that the customers also provide funds to the
companies by factoring receivables and discounting the promissory notes at a
financial institution . The costs of factoring and discounting are included in the
short-term financial expenses.

        Table-1 summarizes the sources of funds and the costs related with
                  Sources of funds and relevant costs
            Source                                 Cost
        Financial institutions                interest rate
        Supplier                              interest rate
                                              purchasing price increase
        Participant                            interest rate
        Government                              interest rate
        Customer                                 selling price decrease

                                       Page 9                               18.06.2011
                       AN EMPIRICAL STUDY

        The purpose of this study is to describe the capital structure of the
manufacturing companies and test the relationship between capital structuring
and the financial strength of these companies in Turkey. The focal point of the
study is to analyze the effect of revaluation fund on describing the capital
structure of a company. The study begins with a classification of the sources of
financing, continues with a survey of recent trends and ends up with the study of
correlation of the sources and the strength.

        Analyses in this study are based on data obtained from the financial
statements of the companies included in the sample. All these statements are
prepared and presented in conformity wıth the regulations of the Capital
Markets Board and independently audited. The source of the data is Istanbul
Stock Exchange, that issues the financial statements of the companies enrolled
in the market. The sample includes all the manufacturing companies registered
in the Istanbul Stock Exchange between the years 1992 and 1998. It is believed
that these companies are fairly well representative of the manufacturing industry
in Turkey. Their existence in the market continuously for 7 years can be taken as
an indicator of their representativeness. The sample of the study is 135
manufacturing companies for the seven years.

        In general the studies focusing on the financial structure of companies in
Turkey have examined the structure in terms of debt-equity relationship rather
than sources of financing, Karsli(1997), Senyuz(1989), Sundararajan(1985).
This study extended its scope not only to the structure of financing but also to
detailed breakdown of the sources of short-term financing and equity financing.

        The issue of available sources of financing is perceived as a major one in
emerging markets like Turkey, especially where there are severe attempts to
control and decrease the high rates of inflation. Furhermore,political and
economic stabilization programs implemented by the government, plus
obligations and responsibilities arising from Turkey's candidacy for entry into
the European Union all tend to affect both the structure and sources of
financing. The overall measure of a company's cost of capital is a function of

                                  Page 10                        18.06.2011
the costs relevant to each source of finance.The major determinants of the cost
of capital for a certain company are the costs of various sources of funds and
the volume of financing the company seeks. Of course, the riskiness of the
company is the most important determinant of the level of the costs.

                                Page 11                       18.06.2011
                      RESEARCH FINDINGS

                       Structure of Financing

        The study has shown that more than 50% of the assets held by the
companies in the sample are financed through external sources(Table-2). The
ratio of internal or equity financing ranged between 49% in 1992 and 44% in
1997. The weight of short-term external financing on the other hand ranged
between 36% in 1992 and 1993 and 39% in 1996 and 1997. The ranking has
always been the same during the seven year period,equity financing has always
occupied the top of the preference list, followed by short-term external
financing.Long-term external financing has always come last..

       Relative weights (in percentages) of various forms of financing

                     92 93     94   95      96   97   98
   Short term       0.36 0.36 0.37 0.37    0.39 0.39 0.37
External financing
    Long term       0.15 0.15 0.17 0.16    0.16 0.17 0.18
External financing
 Internal financing 0.49 0.49 0.46 0.48    0.45 0.44 0.45

       The ''weights'' are based on the sum of the figures presented on the
balance sheets values of 135 same companies for each year.In other words, the
group of 135 companies has been treated as a single entity.

      It is noted that 47% of total financing is supplied by internal sources
and 53% by external sources on the average during the years under study.In

                                Page 12                        18.06.2011
short, companies are financed mainly by external sources and, on the average,
70% of such financing is short-term.
         The major long term external financing source in Turkey is the
investment loans that are provided mainly by government-owned or controlled
financial institutions. The investment loans are rendered to those companies
that have an investment program which is perceived as feasible by the State
Planning Organization and the financial institution. In general, the lending
institution requires that the investor (i.e. the company) contribute 60% of the
funds necessary to implement the investment program, the exact amount varying
according to the nature of the project, the incentives provided by the government
and the riskiness of the company. Long term liabilities have ranged between
15% and 18% of total financing for the period. These mostly constitute the
investment loans of the company that represent approximately 40% of the total
investment program. In other words, 15% to 18% of total assets represent 40%
of the total investment. Then it can be concluded that 37.5% to 45% of total
assets represent the amount of total investments.

      A closer look at the structure of equity financing of the companies is held
by grouping the sources in terms of their origin.

            Capital stock
            Capital reserves
            Profit reserves
            Retained earnings

     The shareholders' equity accounts of the sample companies are grouped
accordingly .Capital stock is the paid in capital account of the company. Capital
reserves are the funds generated by the revaluation of tangible assets and by the
share premiums.Profit reserves are made of the accounts like legal reserves,
statutory reserves, and extraordinary reserves. Retained earnings are the past and
current period profits and losses of the company.

                                  Page 13                        18.06.2011
           Relative weights(in percentages) of the sources in internal financing
                                   92        93     94     95     96     97     98
1. CAPITAL STOCK                  0.39      0.33   0.29   0.24   0.25   0.23   0.29
2. CAPITAL RESERVES               0.33      0.34   0.41   0.41   0.40   0.43   0.42
3. PROFIT RESERVES                0.11      0.11   0.07   0.08   0.11   0.12   0.15
4. RETAINED EARNINGS              0.18      0.22   0.23   0.26   0.24   0.22   0.14

      The research revealed that on the average 39% of equity is generated by
capital reserves. Capital stock is the second supplier with 29%. Retained
earnings provide funds by 21% and profit reserves by 11%. It should be noted
that most of the companies prefer to add the capital reserves to their capital
stock accounts. Although the capital stock account is named as paid in capital it
also includes those injections from the capital reserves .The revaluation fund is
not a cash account although the share premiums are considered as cash funds
for the company.

     The combined contribution of profit reserves and retained earnings which
represent the same source of funds, has always been less than that of capital
reserves during the period studied. The analysis clearly reveals that the capital
reserves constitute the major source of internal financing.This issue requires
further analysis of this source. For the sake of such an analysis, capital reserves
can be defined as reserves generated by the revaluation of tangible assets and
reserves created by the sale of shares following the preemptive stage or during
going public stage.

                                  Page 14                           18.06.2011
                  Breakdown of Capital Reserves(in percentages)

                                  92       93     94     95     96     97     98
Share Premiums                   0.02     0.02   0.02   0.02   0.01   0.02   0.01
Revaluation Funds                0.31     0.32   0.39   0.39   0.39   0.41   0.41
Capital Reserves                 0.33     0.34   0.41   0.41   0.40   0.43   0.42
 Total Shareholders Equity       1.00     1.00   1.00   1.00   1.00   1.00   1.00

      As seen from Table-4, revaluation funds constitute the main compenent
of capital reserves.The weight of the share premium has been between 1 to 2 %
of all the internal sources for the 7 -year period of time. So, the revaluation
fund, considered as capital reserve, seems to be the primary internal source of
financing.Though in the years 1992 and 1993 it takes the second place after
capital stock. The weight of the revaluation fund increases then up to 41%. The
profit generated by the company takes the second place and the capital stock
that is a fresh cash tool of internal financing takes the last place.

     However, it would be misleading to conclude that the companies prefer
mostly internal financing tools. The analysis of percentage breakdowns is
repeated by excluding the revaluation fund from the financial statements. Then
the preferences of the companies, in terms of the weight of sources,line up as
presented in Table-5.

              Average weights of financing sources for the period
                    (revaluation funds excluded)

             Sources of Financing                  %
             1.Short term external financing       45
             2.Internal financing                  35
             3.Long term external financing        20

                                Page 15                        18.06.2011
                The Structure of Short term Financing

      The research has revealed that the companies have employed their
suppliers as their primary source of fund. It must be noted that the group named
as suppliers include the suppliers of materials and services.It is worth noticing
that the weight of utilizing the suppliers have drastically decreased from 49% to
39%.The companies have compensated this decrease by increasing the
utilization of financial loans from 26% to 37%. The decrease in the weight of
suppliers as a source is observed as a continuous trend throughout the period
under study. The increase in the tendency of reaching financial institutions as a
source of fund has not shown a similar trend , there is a decrease in the
utilization of this source starting in 1994 and it continues to decrease until it
reaches lowest levels in 1995 and 1996. Then the trend takes off and reaches to
37% by the end of 1998.The decreasing trend seems to be meaningful when the
government policies are considered. Turkey experienced sharp shifts and
sudden changes in government policies related particularly to the valuation of
foreign currencies in 1994. Such drastic and unexpected changes strongly
affected the manufacturing companies that imported their raw materials but
could not export enough to compensate the losses from importing or put enough
margin on their selling prices without loosing their market shares.This has led
the financial institutions to think twice before rendering financial services to
those companies that have met financial problems. The trend reversed itself
and changed its direction in 1997.

            Relative weights(in percentages) of short term financing tools
                                   92      93     94     95     96     97      98
1. FINANCIAL LOANS                 0.26    0.27   0.25   0.23   0.21   0.28    0.37
2. SUPPLIERS                       0.49    0.41   0.41   0.40   0.41   0.38    0.39
3. SHRHS, PARTCPNS, AFFLNS         0.02    0.01   0.01   0.02   0.02   0.01    0.01
4. GOVERNMENT                      0.19    0.27   0.28   0.30   0.31   0.27    0.18
5. CUSTOMERS                       0.05    0.05   0.05   0.05   0.06   0.05    0.05

                                 Page 16                          18.06.2011
                                                       1. FINANCIAL LOANS
                                                       2. SUPPLIERS
      0,30                                             3. SHRHS, PARTCPNS, AFFLNS
      0,25                                             4. GOVERNMENT
      0,20                                             5. CUSTOMERS
             92   93   94    95      96   97   98

     The suppliers have always occupied the first place in financing the
production companies. The financial institutions dropped from second place to
third for the years 1994,1995, and 1996. The government took the second place
in those years. Then the previous ranking was restored starting in the year 1997.
Eventhough the government is ranked as the third financier, its weight in
financing dropped from 31% to 18% in a period as short as two years. The
reason for the decrease in the importance of the government as a source of
external financing could be the government policy to tighten up the collection of
taxes. The government began to change prevailing or even higher rates of
interest on tax payments that were made past due date. Furthermore
punishments for tax evation were also increased considerably. Such policies
were put into effect mostly after 1996.

    The customers and the shareholders,participants,affiliates have contributed
about 6-8% to short-term financing of the manufacturing companies.

     The ranking of external short term financing parties on the basis of
average weights is presented in Table-7.

                                    Page 17                           18.06.2011
        Average weights of short term financing parties for the perod

         Sources of Financing                           %
         1.Suppliers                                    41
         2.Financial loans                              27
         3.Government                                   26
         4.Customers                                     5
         5.Shareholders,participants,affiliates          1

                   Structure of Financing in Different Industries

     The analysis has been extended to cover the study of financing in different
industries to which the sample companies belong. For this purpose , the nine
groups included in the Istanbul Stock Exchange Market classification of
manufacturing industry, have been used as the main framework.

                                 Page 18                       18.06.2011
       Relative weights(in percentages) of short term and long term liabilities
                  and shareholders' equity for different industries

Industry              Short term Long term       Shareholders' Total
                      Liabilities Liabilities    Equity        Liabilities
                                                               And Equity
Food,Beverage ,Tobacco 40                  12        48           100

Textile, Ready-wear,       39              12         49            100
Wood products,             31              11          58           100
Paper products,Printing,   32              16          52           100
Chemicals,Petroleum,       38              12          49           100
Rubber,Plastic products
Non-metalic mineral        26              15          59           100
Basic metal                25              29          45           100

Fabricated metal products, 49              12          40           100
Machinery equipment
Electricity,Gas,Water       33             43          24           100

Total industry average     37              16          47

        The shareholders' equity seems to be the primary source of finance
except for the fabricated metal products and machinery equipment industry and
the electricity, gas, water industry.The former has employed mostly short term
external sources, while the later has used mostly long term external
sources,mainly investment loans. The fabricated metal industry in Turkey
includes automobile and white goods manufacturing companies that are

                                 Page 19                        18.06.2011
supplied by intermediary industries which are not large in scale and not enrolled
in the stock market. The electricity industry consists of three companies,namely
Aktaş, Çukurova, and Kepez, that have long term debts to government and
financial institutions.

        Relative weights(in percentages) of internal financing for
different industries and ranking of internal financing sources in paranthesis

Industry                  Capital     Capital    Profit      Retained
                           stock      Reserves   reserves    Earnings
Food,Beverage ,           31          36         10          23
Tobacco                   (2)         (1)        (4)         (3)
Textile,Wearing apparel, 34           40         11          15
Leather                   (2)         (1)        (4)         (3)
Wood products,            39          30         9           22
Furniture                 (1)         (2)        (4)         (3)
Paper products,Printing, 35           38         6           21
Publishing                (2)         (1)        (4)         (3)
Chemicals,Petroleum,      25          51         9           15
Rubber,Plastic products (2)           (1)        (4)         (3)
Non-metalic mineral       31          34         9           26
   Products               (2)         (1)        (4)         (3)
Basic metal               32          45         12          11
                          (2)         (1)        (3)         (4)
Fabricated metal products,29          20         16          35
Machinery equipment       (2)         (3)        (4)         (1)
Electricity,Gas,Water     20          14         18          48
                          (2)         (4)        (3)         (1)
Total industry average 29             39         11          21
                          (2)         (1)        (4)        (3)

                                    Page 20                         18.06.2011
             The fabricated metal industry and the electricity,gas,water industry
   have generated retained earnings that is ranked as the first source of internal
   financing.All other industries behaved similar in terms of choosing their internal
   financing sources.

       Relative weights(in percentages) of short term external financing sources
                       for different industries and
               ranking of external financing sources in paranthesis

Industry                   Financial    Suppliers Shareholders     Government Customers
                           loans                  Participations
Food,Beverage ,            40           34        1                22                 3
Tobacco                    (1)          (2)       (5)              (3)                (4)
Textile,Wearing apparel, 50             34        1                13                 2
Leather                    (1)          (2)       (5)              (3)                (4)
Wood products,             20           40        1                35                 3
Furniture                  (3)          (1)       (5)              (2)                (4)
Paper products,Printing, 26             49        2                19                 5
Publishing                 (3)          (1)       (5)              (2)                (4)
Chemicals,Petroleum,       16           42        1                36                 5
Rubber,Plastic products (3)             (1)       (5)              (2)                (4)
Non-metalic mineral        28           37        4                28                 3
   Products                (2)          (1)       (3)              (2)                (4)
Basic metal                39           40        1                15                 6
                           (2)          (1)       (5)              (3)                (4)
Fabricated metal products, 28           43        1                21                 7
Machinery equipment        (2)          (1)       (5)              (3)                (4)
Electricity,Gas,Water      13           48        4                35                 1
                           (3)          (1)       (4)              (2)                (5)
    Total industry average 27              41         1                  26             5
                              (2)         (1)       (5)                  (3)           (4)

                                       Page 21                           18.06.2011
          The manufacturing companies on the average are financed mainly by
capital reserves, then capital stock and retained earnings, lastly by profit
reserves considering their internal financing structure. This ranking holds for
almost all the industries except for Fabricated metal products –machinery
equipment industry and Electricity,gas,water industry. Their primary source is
retained earnings that is followed by capital stock.

          The manufacturing companies on the average are financed mainly by
their suppliers and financial loans considering their external financing structure.

                Revaluation Fund : A deceptive account

           The study has pointed out that the revaluation fund account as a
capital reserve constitute the main source of internal financing. It has ranged
between 38% and 41% of the total internal sources since 1994, becoming the
primary resource for the companies. Its existence on the balance sheet as an
account obviously justifies its treatment as a source and it distorts the real
picture of financial source utilization.
           Debt-equity ratios for the sample companies have been computed to
prove that the revaluation fund is a deceptive account generating misleading
data for the analysis of the companies. The ratios have been calculated with the
revaluation account first icluded as a source and then excluded.

                       Yearly debt-equity ratios

         1992      1993      1994       1995       1996   1997      1998
 With    1.00      1.50      1.00       1.00       1.13   1.13      1.08
Without 1.50       1.56      1.63       1.63       1.86   2.03      1.94

                                    Page 22                       18.06.2011
          It can be seen from Table-11 that the revaluation fund is certainly
misleading. The distortion of the debt-equity ratio becomes particularly striking
after 1994 when the divergence of the two ratios increases significantly as a
result of the growth of the revaluation funds in the capital reserves of the

           It can be stated that the manufacturing companies are almost equally
financed by external and internal sources by referring to debt-equity ratios that
treat the revaluation fund like the other sources. Whereas the picture is quite
different from what it seems. The manufacturing companies are mainly financed
by the external parties and more important is that these parties financed twice
more than the internal sources.

          It must be pointed out that revaluation funds are eventually transferred
to capital stocks and treated as monetary funds thereafter. The balance sheet
presentations do not enable the reader to identify the monetary and
nonmonetary portion of the capital stock account.

           The relationship between the structuring of finance and
           the financial strenght of the manufacturing companies

          The research has also focused on the relationsip between the financing
parties and their financial strength.

           The liabilities and shareholders' equity accounts appearing on the
balance sheets of the companies are classified according to their financing
sources and then converted to a percentage breakdown.This resulted in 945
different compositions derived from the 7-year data of 135 companies.

           In the previous part of the research, the sources of financing was
classified as:
            Financial institutions
            Suppliers

                                  Page 23                        18.06.2011
             Loans from shareholders,participations,affiliates
             Government
             Customers
             Long term liabilities
             Capital stock
             Capital reserves
             Profit reserves
             Retained earnings

           The structure of the liabilities with the above classification are
correlated with the ratios that are generally aggreed to show highlights about
the financial strenght of the companies. Financial strenght is the net result of a
number of policies and decisions. The profitability ratios provide some
information about the combined effects of liquidity, asset management and debt
management on operating results. Net profit margin on sales or profitability
measures net income per lira of sales. Return on assets gives an idea about the
overall return on investment earned by the company. Return on equity measures
the rate of return on shareholders’ investment in the company. The analyses in
this paper have been based upon the following financial ratios:

          Profitability     = Net Profit after taxes/Sales

          Return on Assets = Net Profit after taxes / Total Assets

          Return on Equity = Net Profit after taxes / Total Shareholders' Equity

           The Pearson correlation analysis has been performed to summarize
the relationship between two variables; a weight of the source and a ratio.The
analysis reveals that as the weight of the financial institutions among the sources
of financing increases, profitability, return on assets and return on equity
decrease simultaneously. The same conclusion is derived as the weight of the
capital reserves increase. This is an evidence that capital reserves, that is mostly
composed of revaluation funds, are not real funds but fictitious. Whereas, as the
relevance of retained earnings being a real fund with least cost increases,
profitability, ROA and ROE.(Appendix I)

                                  Page 24                         18.06.2011
          Regression analysis has been conducted to see to analyze the
relationship between the dependent variable; profitability, ROA, and ROE and
set of independent variables; the percentage breakdown of the sources of
financing of the companies. (Appendix II)

          Obviously there are many other micro and macro economic variables
that define the independent variables. Because, the structure of financing
explains only 30% of profitability, 41% of ROA and 13% of return on equity.

           Profitability is best explained by capital stock and retained earnings,
that also covers the current period profit, that is the financing of the companies
through capital injections and profit generations have positive effect on
profitability.The ROA is best explained with government financing , capital
stock and retained earnings. It is seen that internal financing through capital
inflows from the shareholders and retained earnings of the companies that are
generated by the company with its operations brings higher profitability and
return to the company. The capital inflows from the shareholders in Turkey do
not totally constitute cash injections, but also include stock dividends which are
non-monetary.Unfortunately, it is hard to differentiate the monetary and non-
monetary funds in the capital stock account without referring to detailed
accounts of the companies.
           The results of the regression and Pearson's analysis lead to an
understanding that the shareholders and the company itself are the best financing
parties to the companies if their objective is to increase profitability, ROA and

                                  Page 25                        18.06.2011

           An extensive analysis of structure of financing of production
companies for the years between 1992 and 1998 in Turkey reveal that the
companies have preferred equity financing as the primary source of finance.
This is followed by short-term outside financing. Long-term outside financing is
least preferred. A closer analysis of the issue points out that the components of
shareholders' equity in Turkey covers both monetary and non-monetary sources
of finance.The iteration of the analysis with the consideration of only monetary
items as the equity components changed the outlook for the structure, namely
debt-equity ratios. The production companies in fact prefer or find the short
term external financing more easily accessible or perceive it more efficient than
equity financing.

           The main short term external source of financing has always been the
suppliers of these production companies.However, it must be noted that the
weight of their support has decreased, from 49% in 1992 to 39% in 1998.
There has been a continuous decline over the years. The support that is lost from
the suppliers is compensated with additional support from the financial
institutions, which have shared the second place with the government in
providing support to manufacturing companies. The support of government was
highest between the years 1995 and 1997.It shows a sharp decrease in 1998. The
support lost from the government is also compensated by the financial

           The analysis pertaining to different production industries has shown
that the basic metal industry and the electricity,gas,water industry are financed
mainly by long term external sources. The food,beverage,tobacco industry and
the textile industry are primarily financed by financial loans, all other industries
by their suppliers.The government has been a major source of financing for the
wood industry,the electricity gas water industry, and the chemicals,petroleum

                                  Page 26                         18.06.2011
          The research has tried to define the structure of financing in
manufacturing companies in an emerging market , Turkey. It also tried to focus
on the best possible structure that increases financial strenght. It is seen that the
companies that preferred or found available equity financing generated better
financial ratios. It is also seen that companies have not utilized long term
financing tools in any significant amount. The research revealed that the ratio of
financing the operations by long term external parties has increased from 15 %
in 1992 to 18 % in 1998.The cost of long term financing by external parties is
known to be the lowest compared to cost of short term debt and cost of equity.
The trend of utilizing long term debt more is expected to result in lower
average cost of financing and therefrom better financial statements. The
research has also revealed the primary importance of equity financing.

                                   Page 27                         18.06.2011
                         APPENDIX I
                     Pearson Correlation Analtsis

           Table-A presents the correlation coefficients between the variables
with 99% level of confidence. A negative sign does not imply a bad fit rather it
denotes an inverse relationship.When the linear regression line is a poor fit to
the data, the coefficient reaches zero, indeed the value zero denotes the absence
of a linear relationship. Pearson's correlation coefficient serves the purpose for
linear regression as an indicator of the goodness of fit and a measure of
association indicating the strength of the linear relationship between the two

                Table-A Pearson's correlation coefficients

Sources                 Profitability ROA                  ROE
Financial institutions   - 0.29       -0.34                - 0.14
Suppliers                - 0.18       -0.14                - 0.01
Loans from shareholders… - 0.06       -0.07                +0.14
Government               +0.17        +0.31                +0.20
Customers                - 0.03       -0.04                +0.01
Long term liabilities    - 0.17       -0.21                +0.01
Capital stock              0.00       -0.09                - 0.01
Capital reserves         - 0.11       -0.18                - 0.22
Profit reserves          +0.11        +0.16                - 0.02
Retained earnings        +0.52        +0.62                +0.22

            As the weight of the financial institutions increases as a financing
party, all three of the financial ratios decrease.
            As the weight of the capital reserves increases as a financing party, the
three of the financial ratios decrease.

                                   Page 28                          18.06.2011
           As the weight of the retained earnings increases as a financing source,
the three of the financial ratios increase.
           As the companies are more financed by the suppliers, the profitibality
and the ROA ratios decrease.
           As the companies reserve more profits, the profitibality and the ROA
ratios increase.
           As the companies increase their long term external financing, the
profitibality and the ROA ratios decrease.
           As the companies increase government debt, all three of the financial
ratios increase.
           There is not a significant relationship between the weight of capital
stock as a source and any of the financial ratios.
           There is not a significant relationship between the weight of
customers as a source and any of the financial ratios.

                                  Page 29                        18.06.2011
                       APPENDIX II
                       Regression Analysis

          The objective of the regresssion analysis was to find out the best
linear prediction equation and to evaluate the contribution of set of variables.




            Y1' is the dependent variable ,profitability
            Y2' is the dependent variable , ROA
            Y3' is the dependent variable , ROE
            X1 is the independent variable , the ratio of financial institutions to
total liabilities and shareholders' equity
            X2     is the independent variable , the ratio of suppliers to total
liabilities and shareholders' equity
            X3      is the independent variable , the ratio of loans from the
shareholders, affiliates , participations to total liabilities and shareholders'
            X4 is the independent variable , the ratio of government to total
liabilities and shareholders' equity
            X5 is the independent variable , the ratio of customers to total
liabilities and shareholders' equity
            X6 is the independent variable , the ratio of long term liabilities to
total liabilities and shareholders' equity
            X7 is the independent variable , the ratio of capital stock to total
liabilities and shareholders' equity
            X8 is the independent variable , the ratio of capital reserves to total
liabilities and shareholders' equity
             X9 is the independent variable , the ratio of profit reserves to total
liabilities and shareholders' equity

                                  Page 30                         18.06.2011
             X10 is the independent variable , the ratio of retained earnings to
total liabilities and shareholders' equity
              Table-B presents the results of regression analysis in brief.

                     Results of Regression Analysis

                                                   Std. Coefficients
Dependent variable          R Square              With 5% significance

                                                      X7    0.176
Y1' profitability             0.302                   X10   0.586

                                                      X4    0.095
Y2' ROA                       0.407                   X7    0.116
                                                      X10   0.611
                                                      X3    0.162
Y3' ROE                       0.127                   X4    0.132
                                                      X8    0.113
                                                      X10   0.240

                                 Page 31                       18.06.2011

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