The Effect of Earning Risk on Debt: Evidence from Turkey

Abstract

This study examined the effect of firms’ earning risk on their debt ratios controlling for some macroeconomic factors and firm size. A sample of 60 firms was selected from the first-100 of Istanbul Stock Market to collect firm-level data of earning risk and debt ratios. Macroeconomic data were obtained from the development indicators of the World Bank. A cross-sectional analysis was conducted to explore the effect of earning risk and macroeconomic variables of inflation, stock market growth rate, and economic recession on the short-term and long-term debt ratios of sample firms. Results suggested that earning risk, inflation, and economic recession are positively correlated with short-term, and negatively correlated with long-term debts regardless of firm size. The only exception to this is the stock market growth rate, which is negatively correlated with both short-term and long-term debt. While the theories of corporate finance do not distinguish between the maturities of debt when constructing their hypotheses, the findings of this study suggest that firms act in a different direction in their short- and long-term financing decisions against earning risk, inflation, and economic recession.

Keywords: capital structure, earning risk, tradeoff, market timing, corporate finance

DOI: 10.7176/RJFA/10-4-08