The link between exchange rate volatility and capital structure under financial liberalization: evidence from the Turkish manufacturing sector

The main purpose of this article is to examine the effect of exchange rate volatility on the corporate capital structure for firms in the Turkish manufacturing sector during the period of 1990–2017. This period is considered the post-financial liberalization period. This article uses a novel dynamic multiplier analysis which is based on the Panel Vector Autoregressive Model which takes into account endogeneity, firm dynamics, and omitted variable bias. The obtained findings show that real exchange rate volatility forces the firms to use their internal finance sources in the Turkish manufacturing sector even though the Turkish economy experienced a much earlier financial liberalization process than other emerging markets. In addition, the exporter, and those firms without special business group affiliates (non-TUSIAD member firms), have more exposure to real exchange volatility than their exporter and TUSIAD member peers.