The Impact of Recent Economic Crisis on the Capital Structure of Turkish Corporations and the Test of Static Trade-off Theory: Implications for Corporate Governance System

Turkey has experienced two economic shocks, where the second one had devastating effects on the financial sector and real sector. The purpose of this paper is to show the impact of economic crisis on the capital structure of corporations, which are traded in İstanbul Stock Exchange, and the impact of capital structure on the performance of corporations. It is hypothesized that high leverage firms before economic crisis incurred more losses than the low leverage firms after the crisis. In order to test this hypothesis 96 firms, which are representatives of Turkish real sector are used for the quarters of 1999-2001. T-tests and regression analysis are used to test this hypothesis. The findings confirm that this hypothesis is true. The implications of this finding is more important than the finding because if this finding is true than Turkish corporations can immunize themselves to economic crisis, which cannot be anticipated easily, by having low leverage ratios. This is very difficult for Turkish corporations because the ownership structure, which is concentrated, and legal system, which does not solve the agency problems between stakeholders, would not let having low leverage ratios for Turkish corporations. Therefore, a solution set will be presented to change the corporate governance system, which is believed to help firms to immunize themselves against economic crisis, of Turkish corporations which are traded in İstanbul Stock Exchange.