Financial Crisis and Firm Performance: empirical evidence from Turkey

• Date: 01 July 2006
• Published date: 01 July 2006
• DOI: http://doi.org/10.1111/j.1467-8683.2006.00508.x
• Author: C. Bulent Aybar,Halit Gonenc

FINANCIAL CRISIS AND FIRM PERFORMANCE

297

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2006144••••ORIGINAL ARTICLES

FINANCIAL

CRISIS AND FIRM PERFORMANCECOPRORATE

GOVERNANCE

*Address for correspondence:

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Financial Crisis and Firm Performance:

empirical evidence from Turkey

Halit Gonenc* and C. Bulent Aybar

The objective of this study is to examine the impact of concentrated ownership and business

group affiliation on the performance of Turkish firms during the financial crisis by controlling

balance sheet currency exposure, international involvement and firm size. Our analysis

focuses on a 12-month window encapsulating the February 2001 financial crisis. Our findings

show that balance sheet exposure is the key determinant of the firm performance during

the crisis periods. While we find evidence that firms with higher concentrated ownership

experience lower stock market performance prior and during the financial crisis, business

group affiliation does not have any impact on the performance. However, there is weak

evidence that stock market performance increases with the level of business group

diversification.

Keywords: Financial crisis, firm performance, exchange rate exposure, concentrated

ownership, business groups, group diversification, emerging market

Introduction

ecent studies point to the significance of

corporate governance in stock market

performance during financial crises in emerg-

ing markets (Johnson

et al

., 2000; Mitton, 2002;

Lemmon and Lins, 2003). Corporate gover-

nance is the protection of outside investors

against insider expropriation. Aggressive

expropriation both by managers and control-

ling shareholders is particularly important for

emerging markets, because emerging markets

typically suffer from low investor protection

practices. Particularly, when return expec-

tations lingered, insider expropriation in these

markets accelerates (Johnson

et al

., 2000).

Therefore, consideration of corporate gover-

nance may provide additional insights in

investigations of stock return performance,

especially during a financial crisis.

The objective of the current study is to

analyse the impact of a financial crisis on the

exchange listed non-financial Turkish firms.

The Turkish economy experienced a massive

R

currency crisis when its crawling peg regime

collapsed on 21 February 2001. Within the

course of two days, the Turkish Lira devalued

as much as 31 percent against the US dollar.

The currency crisis quickly spiralled into a

systemic financial meltdown and the Turkish

economy contracted by 10 percent in 2001.

The prolonged recession dragged until the

economy recovered in 2003. This period pro-

vides the context for our study. We analyse the

impact of this large currency value depreci-

ation on the firm performance by focusing on

two dominant corporate governance factors;

fraction of shareholders, who have control on

management, and affiliation of firm with a

business group. In this analysis, we control

firm balance sheet currency exposure and

degree of international involvement as sig-

nificant determinants of firm performance.

Unlike the conventional exposure studies,

we use two proxies for currency exposure:

Total exposure and debt exposure. Total expo-

sure is defined as the ratio of net balance sheet

exposure (difference between the Turkish Lira