Credit crunch or not? Case of Turkey during the global economic crisis

This paper analyzes whether Turkish firms experienced a credit crunch at the outset of the global crisis. Our
hypothesis is that if a credit crunch was experienced in Turkey, firms that had higher pre-crisis leverage
ratio and were more dependent on external finance for investment and working capital must have been
affected more severely. Hence, we should observe a higher drop in their stock returns at the time. Using
firm-level data, we find that dependence on external finance for investment is an important explanatory
variable for explaining the decrease in stock returns during the crisis. However, the cash conversion cycle
and pre-crisis leverage has no significant effect on stock returns of firms. We also run the same regressions
for pre-crisis drops in the stock market for placebo test. We find that stock returns weren’t affected by
leverage or dependence on external finance for investment and working capital in the pre-crisis time. This
suggests that Turkish firms experienced a credit crunch at the outset of the crisis even though Turkish
banking sector was intact. On the other hand, we find no evidence for a demand effect: Being an exporter
does not matter for the decrease in stock returns.