Financing constraints and investment : the case of Turkish manufacturing firms

Using a comprehensive firm-level data that covers nearly 75% of total employment in Turkish manufacturing industry for the period 1992–2003, this study tests whether Turkish firms are financially constrained or not. Based on the pioneering work of Fazari, Hubbard and Peterson (1988), numerous studies have examined the role of financing constraints in determining investment decisions of firms. Most of these studies check for investment-cash flow sensitivity in order to identify financing constraints. This study follows the approach of Fazari, Hubbard and Peterson (1988) that interprets a significant positive relationship between firms’ investment and the measure of their internal finance (cash flow) as evidence of financing constraints, which might arise due to capital market imperfections. The results presented here suggest a significant positive relationship between firms’ investment and their cash flow. This finding is robust to controlling firm specific characteristics such as size and age. As a result, the study contributes to the financing constraints literature by studying the issue in a developing country context.