The evaluation of the relationship between enterprise's investment and financing decisions: A dynamic panel data analysis on Turkish manufacturing enterprises

Business firms are institutions aiming to optimize investments, financing and profit. They make investment in order to maximize firm value and intent to minimize financing costs while realizing these investments. In this regard, the empirically detection of the relationship between investments and financing resulting from inefficient markets and information asymmetries is very important for the financial management of the enterprises. Especially, the more effective management of investment financing resources is becoming imperative in the manufacturing industry in which the investment is more costly and more long-term oriented. As a consequence; both the management of scarce financing resources that are needed for the investment and decision making about investment financing should be carried out more carefully nowadays. In this study, the relationship among investments and financing decisions in Turkish Manufacturing Sector and which investment is financed by which resource is analyzed for the 2005 – 2012 time range. The study also covers the effect of basic macro economical variable risk free interest rate on investment financing decisions. Basically the question of how the Turkish Manufacturing Industry has carried out the financial management of investment projects is tried to be answered. The results have showed that financing decisions are affected by investment decisions, profit and dividend. Except equity, sources of financing like debt and cash and cash equivalents are affected by past financing decisions. While net working capital is financed through cash, short term debt and equity; capital expenditures are financed by cash, long term debt and equity. Risk free interest rate is realized as negatively proportional to financing sources however it has no changing effects on the direction and significance of the effect of enterprise related factors investment, working capital, profit and dividend have on financing decisions. Thus, business specific factors becomes the most important factors for investment financing decisions in stability. Key Words: Financing Decisions, Investment Decisions, Profit, Dividend, Risk Free Interest Rate