The impact of macroeconomic factors on capital structure and credit risk: An application on ise 100 firms

For the banking sector which is built on mutual trust, credit risk is a current and important issue. Credit risk is affected by a lot of factors. Macroeconomic factors and capital structure choice are the most important factors that have an effect on credit risk. This situation is the result of the recent developments in financial markets. Becuase credit risk and its effects on banks? capital structures wasn?t taken seriously, banking crisis? became a part of finance sector in the past. Recently , there are quite a lot developments done to prevent such negativities; but the most important development of all is the Basel II Accord. Basel II Accord is a regulation about banks? capital structures and it aims to prevent losses that proceed from credit risk. Thus, banks need to determine the credit risk level of the firm that they are going to lend by a series of credit analysis. Banks can avoid credit risk by developing a beneficial risk management policy. That?s why credit risk modelling is important in risk management systems. Because credit risk models provide both firm based and portfolio based measurement of credit risk, banks should find these models useful. The frame work of this paper is to measure the effect of macroeconomic conditions on capital structure choice. Consequently the effect of macroeconomic factors on capital structure and credit risk is measured by a derivated econometric model. This model is applied to ISE 100 firms including a three regime choice. These regimes are represented by the years 2001, 2003 and 2005. The result of the analysis applied in this paper shows the changes in and the effect of macroeconomic factors on capital structures and credit risks of the firms throughout the years . Key Words: Credit Risk, Capital Structure Choice, Macroeconomic Conditions