Investment under financial liberalization: Channels of liquidity and uncertainty
This dissertation examines the effects of financial liberalization on investment decisions of manufacturing firms in Turkey, through the channels of liquidity and uncertainty. While the former channel is analyzed in the literature on financing constraints, the latter is left out of the studies investigating investment behavior under liberalization. As suggested by literature on financing constraints, the positive role of liquidity in determination of investment is expected to be eliminated with liberalization, since firms would have better access to capital markets. I argue that with the consideration of heightened instabilities, the expected change in the importance of liquidity may not take place, as investment is impeded by uncertainty.
Based on the results of a qualitative field research project that involved interviewing the managers of manufacturing firms in Turkey, a firm level investment model which contains output, liquidity and uncertainty as the determinants of investment, is developed in the dissertation. I test the validity of the model with a novel unbalanced data set from Turkish economy, comprising 165 manufacturing firms for the period 1985-2003. The econometric estimation technique adopted estimating this dynamic model is Generalized Moment of Methods (GMM). Based on this benchmark, hypotheses regarding the role of internal funds and uncertainty under the impact of financial liberalization are tested by utilizing various aggregate financial deepening indicators. I also identify different effects across the different firm categories of size, export orientation and maturity.
Econometric tests and survey results provide evidence for a negative relationship between firm level investment and uncertainty variables, and a positive relationship with liquidity and sales variables. The negative impact of uncertainty on investment is worsened under financial liberalization due to nonlinearities in investment-uncertainty relationship as suggested by Post Keynesian theory. There is no evidence for a declining importance of liquidity. Overall, results suggest that financial reform policies did not lead to the expected benefits for the investment of real sector firms while producing increased uncertainty that impedes investment further.