Determinants of firm capital structure in the turkish manufacturing sector: The test of pecking order and market timing theories

Firm capital structure is a widely studied field in the literature of finance. This study aims to contribute to the ongoing capital structure debate in Turkey, by testing the validity of pecking order and market timing theories for Turkish manufacturing firms listed in the ISE between 2004 and 2007.On the other hand, this study examines determinants of firm capital structure by empirically observing how asset growth, non-debt-tax-shields, profitability, size and tangibility are correlated with firm leverage.In the light of the empirical observations it has been found that pecking order hypothesis of the financing hierarchy is not valid in Turkish manufacturing sector. However, strong support has been observed for the existence of market timing behavior which was supported by statistically significant and big market timing coefficients. Finally, empirical tests for capital structure determinants showed that profitability, asset growth and tangibility are important in capital structure formation process.General findings showed the following, Turkish manufacturing firms listed in the ISE reduce debt financing by approximately 1.66% per 10% overvaluation of equity, approximately 29,2% of the financial deficit is financed with debt and the rest with equity, in contrast to the pecking order hypothesis, big firms utilize more debt. Finally, findings have suggested that high overvaluation of the firm is treated as good signal by credit supplying authorities which provides extra opportunity to such firms to raise more debt.