The Determinants of the Price-Cost Margins of the Manufacturing Firms in Turkey

This study examines the determinants of the price-cost margins in the Turkish manufacturing industry spanning from 1995 to 2003. The literature on this subject points to the importance of market structure, business cycles and input costs. Utilizing panel data econometric techniques on a large number of manufacturing firms by conditioning on their firm size, age, ownership and export orientation, the study finds that there exists a marked difference among the firms’ pricing behaviors according to their market share. Import penetration seems to be ineffective to reduce the price-cost margins of large, high market share and foreign partner firms, while exporting activity was observed to act as a factor to enhance competition. The analysis also suggests that price-cost margins behave pro-cyclically in general and an appreciation of the domestic currency reduces price-cost margins by way of lowering input costs.Price-cost margins, Market Structure, Import Penetration

Monetary Policy, Corporate Financial Composition and Real Activity

This paper addresses two fundamental questions about monetary policy, credit conditions and corporate activity. First, can we relate differences in the composition of debt between tight and loose periods of monetary policy to firm characteristics like size, age, indebtedness or risk? Second, do differences in companies’ financial compositions matter for real activity of firms such as inventory and employment growth? The paper offers some evidence from firms in the UK manufacturing sector which suggests the composition of debt differs considerably with characteristics such as size, age, debt and risk, it also shows a significant effect from financial composition and cash flow to inventory and employment growth.Monetary Policy, Inventory Investment, Employment, Firm Type

Using distinguishing and UIO sequences together in a checking sequence

If a finite state machine M does not have a distinguishing sequence, but has UIO sequences for its states, there are methods to produce a checking sequence for M. However, if M has a distinguishing sequence D, then there are methods that make use of D to construct checking sequences that are much shorter than the ones that would be constructed by using only the UIO sequences for M. The methods to applied when a distinguishing sequence exists, only make use of the distinguishing sequences. In this paper we show that, even if M has a distinguishing sequence D, the UIO sequences can still be used together with D to construct shorter checking sequences

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.Balance sheets, Cash flow, Corporate sector, Financial constraints, Financial crowding-out, Investment, Liquidity demand, Panel data, Turkey

External finance, and the credit channel of transmission of monetary policy in the UK manufacturing industry

Understanding the mechanism through which monetary policy affects real economic activity is a very important issue for attaining macroeconomic stability. Financial innovations during the last two decades and imperfections in the financial markets make this mechanism more complicated. The link between policy and real activity can be better understood by taking into consideration the variety of financial assets, agency costs, micro level information involved in financial transactions and identification of supply and demand effects. We provide a theoretical review where monetary policy affects the real activity not only through the traditional 'interest rate channel' but also by changing the financial positions of firms. In this framework, we identify the responses of firms with various characteristics to monetary policy shocks through the financial accelerator where credit market conditions amplify and propagate the impact of monetary shocks on real activity of financially weak and small firms. Agency costs and other informational problems are more influential on the availability and cost of financial sources and financial choices for these firms, which is very important for the economic performance. We test these predictions empirically by using a panel of more than fifteen thousands UK manufacturing firm records during the period of 1990-1999. We show that the financial choices of small, young, risky and highly indebted firms are more sensitive to tight monetary conditions than those of large, old, secure and low indebted firms. The evidence is consistent with the credit channel where monetary policy has distributional implications for the bank dependent firms that face difficulties in getting external finance during tight periods. We also test the impact of policy on firms' inventory investment and employment growth by taking into account base rate to capture the user cost of capital, the ratio of the short term debt to current liabilities, and cash flow in addition to other control variables across firm characteristics by using dynamic panel estimation procedures. This framework enables us to avoid some empirical issues, e.g. identification concerning cash flow, ad hoc sample splitting criteria (classifying firms as financially constrained or unconstrained) and endogeneity problem between firm specific variables and inventory investment and employment. Financial variables consistently explain both inventory investment and employment growth across firm groups but the former is more sensitive to the financial variables and the monetary policy stance. Our results imply that the financial structure of firms makes a difference for their real activity, therefore verifying the credit channel for the UK economy

External finance, and the credit channel of transmission of monetary policy in the UK manufacturing industry

Understanding the mechanism through which monetary policy affects real economic activity is a very important issue for attaining macroeconomic stability. Financial innovations during the last two decades and imperfections in the financial markets make this mechanism more complicated. The link between policy and real activity can be better understood by taking into consideration the variety of financial assets, agency costs, micro level information involved in financial transactions and identification of supply and demand effects. We provide a theoretical review where monetary policy affects the real activity not only through the traditional 'interest rate channel' but also by changing the financial positions of firms. In this framework, we identify the responses of firms with various characteristics to monetary policy shocks through the financial accelerator where credit market conditions amplify and propagate the impact of monetary shocks on real activity of financially weak and small firms. Agency costs and other informational problems are more influential on the availability and cost of financial sources and financial choices for these firms, which is very important for the economic performance. We test these predictions empirically by using a panel of more than fifteen thousands UK manufacturing firm records during the period of 1990-1999. We show that the financial choices of small, young, risky and highly indebted firms are more sensitive to tight monetary conditions than those of large, old, secure and low indebted firms. The evidence is consistent with the credit channel where monetary policy has distributional implications for the bank dependent firms that face difficulties in getting external finance during tight periods. We also test the impact of policy on firms' inventory investment and employment growth by taking into account base rate to capture the user cost of capital, the ratio of the short term debt to current liabilities, and cash flow in addition to other control variables across firm characteristics by using dynamic panel estimation procedures. This framework enables us to avoid some empirical issues, e.g. identification concerning cash flow, ad hoc sample splitting criteria (classifying firms as financially constrained or unconstrained) and endogeneity problem between firm specific variables and inventory investment and employment. Financial variables consistently explain both inventory investment and employment growth across firm groups but the former is more sensitive to the financial variables and the monetary policy stance. Our results imply that the financial structure of firms makes a difference for their real activity, therefore verifying the credit channel for the UK economy