**2. Literature review**

show that investment in WCR has an important effect on the profitability of firms, another issue, at least as important as investment in WCR, is the linkage between profitability and WCR financing. Since the types and maturities of financing sources have a direct impact on the costs and the risks of firms, it is expected that how WCR is financed will also have an effect on profitability. The literature on the relationship between WCR financing and profitability is very limited (i.e., there is only one study by Banos-Caberollo, Garcia-Teruel, and Martinez-Solano [8]). To the best of our knowledge, there is no study in Turkey related with this subject.<sup>2</sup> Financial managers consider the general economic conditions, industrial factors, legal regulations, firm-specific factors, and the reaction of the lenders when deciding on the maturity and the type of the financing instruments they choose. At the same time, appropriateness, risk, cost, the financial leverage effect, flexibility in usage, timing, and the possible claims on

There are many advantages of using short-term debt in financing WCR. The most important advantage of short-term debt is its cost advantage. Normally, short-term debt is less costly than long-term debt. In addition, compared with long-term debt, short-term debt is easier to obtain and provides more flexibility over spending. But, short-term funds are riskier than long-term funds. This risk is due to the immediate payment of the short-term obligations, the refinancing requirement, and the uncertainty in interest rates when refinancing requirement arises. It is known that firms may face bankruptcy when they have difficulties in payment of short-term funds and when these funds are not renewed [11]. Due to these risks, the cost

As stated by Banos-Caberollo, Garcia-Teruel, and Martinez-Solano, usage of short-term funds provides a cost advantage to the firms when a low percentage of WCR is financed by shortterm debt. However, if a high percentage of WCR is financed by short-term debt, an additional increase in short-term debt will increase the risk of repayment as well as the risk of renewing the funds and will cause the lenders to demand higher interest rates from the firms. Therefore, at lower levels of short-term debt-to-WCR ratios, the expected relationship between the proportion of short-term funds used to finance WCR and profitability is positive, but at higher

The first aim of this study is to reveal the relationship between the proportion of short-term funds used in WCR financing and profitability in the Borsa Istanbul chemical, petroleum, rubber, and plastic sector. If the relationship turns out to be as expected, then the level at which the short-term debt-to-WCR ratio turns from positive to negative will also be investigated. To do this, the firms operating in the chemical, petroleum, rubber, and plastic sector in Borsa İstanbul over the 2005–2015 period are analyzed using two-step GMM method. This study finds a concave-shaped relation between the proportion of short-term financial debt that is used to finance WCR and profitability. The ratio of short-term financial debt increases profitability up to the breakpoint, but the effect of short-term debt on profitability turns to negative

In Turkey, Poyraz analyzed the effects of working capital financing strategies on a single bank using multiple regression

analysis [9]. Their methodology and scope are very different from our study.

levels of the short-term debt-to-WCR ratios, the expected relationship is negative [8].

management are also taken into account in the selection processes [10].

advantage of short-term debt is not limitless.

176 Financial Management from an Emerging Market Perspective

above this point.

2

The literature on working capital management is generally focused on the relationship between investment in WCR and profitability.

Deelof investigated the effect of working capital management on Belgian firms' corporate profitability over the 1992–1996 period. They used fixed effects and ordinary least squares methods and found that the reduction in the number of days accounts receivable, the number of days inventories and the number of days accounts payable all have a positive effect on profitability [1].

For the small and medium enterprises in Portugal, Pais and Gama analyzed the effect of working capital management on profitability over 2002–2005 period. The results of the panel data analysis show a negative relationship with profitability for the number of days accounts receivable, the number of days inventory, and the number of days accounts payable. But when controlled for endogeneity, the relationship between the number of days accounts receivable and profitability is reversed [7].

Controlling for unobservable heterogeneity and possible endogeneity, Banos-Caberollo, Garcia-Teruel, and Martinez-Solano show a non-monotic relationship between the level of working capital and profitability. It is also stated in the study that firms have an optimal working capital level and that deviation from that level harms profitability [12].

Using multiple regression analysis, Vahid, Elham, Mohsen, and Mohammedreza conducted an analysis on a number of companies in the medicine and cement industries in Iran over the 2006– 2009 period. The results showed that an increase in the average collection period, inventory turnover in days, average payment period, or net trading cycle decreases profitability. As for the effect of cash conversion cycle on profitability, the results are found to be insignificant [2].

For Indian manufacturing companies, Singhania, Sharma, and Rohit analyzed the effect of working capital management on profitability by taking into account the impact of macroeconomic variables on this relationship. Utilizing correlation and fixed-effects estimation methods, it is revealed that the cash conversion cycle has a negative effect on profitability. Decreasing the number of days accounts receivable and increasing the number of days accounts payable increase the profitability ratios of Indian manufacturing companies. Also, it is stated that global macroeconomic factors should be taken into consideration in formulating working capital strategies [13].

A different study in the field of working capital management belongs to Aktas, Croci, and Petmezas in which the authors analyzed the effects of working capital management on the stock and operating performance of a large sample of firms in US between 1982 and 2011. The results of the study show that firms have an optimal working capital level and divergence from this level harms to the stock and operating performance of the firms. The authors also documented that working capital management increases corporate performance through corporate investment channel [14].

In Turkey, Öz, and Güngör, Akbulut, Coşkun, and Kök, Kendirli, and Konak and Şamiloğlu, and Demirgüneş analyzed the effect of working capital management on profitability [3–6, 15]. Öz and Güngör analyzed the effect of working capital management indicators on the profitability of a number of Turkish manufacturing firms on Borsa Istanbul over the 1992–2005 period. Using panel data analysis, it is documented that receivable turnover, payable turnover, inventory turnover, and net trade period negatively affect profitability [3].

Şamiloğlu and Demirgüneş used multiple regression analysis to determine the effect of working capital management on profitability of Turkish manufacturing firms that are listed on Borsa Istanbul over 1998–2007 period. The results show that accounts receivable, inventory period, and leverage ratios negatively affect profitability, whereas firm growth has a positive effect on it. From the other variables, cash conversion cycle, size, and fixed financial assets are found to be insignificant [15].

Using regression and ANOVA, Akbulut analyzed the effect of cash conversion cycle on profitability on Turkish manufacturing firms that are quoted on Borsa Istanbul over 2000–2008 period. As a result of the study, it is found that there is a negative relationship between cash conversion cycle and profitability [4].

Using dynamic panel data analysis, Coşkun and Kök analyzed the effects of cash conversion cycle, inventory period, accounts receivable period, and accounts payable period on profitability of a number of Turkish manufacturing firms over the period of 1991–2005. The results show a negative relationship between cash conversion cycle, inventory period, and accounts receivable period on profitability. But the relationship between accounts payable period and profitability is found to be positive [5].

Using multiple regression analysis, Kendirli and Konak analyzed the working capital management and profitability relationship for the firms that are quoted on Borsa Istanbul Tourism Index. The study covers the 2010–2014 period. The study finds that although cash conversion cycle has a positive effect on profitability, the coefficients of the components of cash conversion cycle such as the accounts receivable period and accounts payable period are found to be insignificant. Looking at the control variables, we observe that the sign of the relationship between leverage and profitability is negative, whereas the effect is positive for the total assets ratio [6].

The only study that investigates the relationship between WCR financing and profitability belongs to Banos-Caberollo, Garcia-Teruel, and Martinez-Solano. Banos-Caberollo, Garcia-Teruel, and Martinez-Solano analyzed the WCR financing-profitability relationship using a two-step GMM method for small and medium enterprises over the 1997–2012 period in Spain. The results show that there is a concave relationship between short-term WCR financing and profitability [8].

the number of days accounts receivable and increasing the number of days accounts payable increase the profitability ratios of Indian manufacturing companies. Also, it is stated that global macroeconomic factors should be taken into consideration in formulating working capi-

A different study in the field of working capital management belongs to Aktas, Croci, and Petmezas in which the authors analyzed the effects of working capital management on the stock and operating performance of a large sample of firms in US between 1982 and 2011. The results of the study show that firms have an optimal working capital level and divergence from this level harms to the stock and operating performance of the firms. The authors also documented that working capital management increases corporate performance through cor-

In Turkey, Öz, and Güngör, Akbulut, Coşkun, and Kök, Kendirli, and Konak and Şamiloğlu, and Demirgüneş analyzed the effect of working capital management on profitability [3–6, 15]. Öz and Güngör analyzed the effect of working capital management indicators on the profitability of a number of Turkish manufacturing firms on Borsa Istanbul over the 1992–2005 period. Using panel data analysis, it is documented that receivable turnover, payable turnover,

Şamiloğlu and Demirgüneş used multiple regression analysis to determine the effect of working capital management on profitability of Turkish manufacturing firms that are listed on Borsa Istanbul over 1998–2007 period. The results show that accounts receivable, inventory period, and leverage ratios negatively affect profitability, whereas firm growth has a positive effect on it. From the other variables, cash conversion cycle, size, and fixed financial assets are

Using regression and ANOVA, Akbulut analyzed the effect of cash conversion cycle on profitability on Turkish manufacturing firms that are quoted on Borsa Istanbul over 2000–2008 period. As a result of the study, it is found that there is a negative relationship between cash

Using dynamic panel data analysis, Coşkun and Kök analyzed the effects of cash conversion cycle, inventory period, accounts receivable period, and accounts payable period on profitability of a number of Turkish manufacturing firms over the period of 1991–2005. The results show a negative relationship between cash conversion cycle, inventory period, and accounts receivable period on profitability. But the relationship between accounts payable period and

Using multiple regression analysis, Kendirli and Konak analyzed the working capital management and profitability relationship for the firms that are quoted on Borsa Istanbul Tourism Index. The study covers the 2010–2014 period. The study finds that although cash conversion cycle has a positive effect on profitability, the coefficients of the components of cash conversion cycle such as the accounts receivable period and accounts payable period are found to be insignificant. Looking at the control variables, we observe that the sign of the relationship between leverage and profitability is negative, whereas the effect is positive for the total assets

inventory turnover, and net trade period negatively affect profitability [3].

tal strategies [13].

porate investment channel [14].

178 Financial Management from an Emerging Market Perspective

found to be insignificant [15].

conversion cycle and profitability [4].

profitability is found to be positive [5].

ratio [6].

In Turkey, Poyraz analyzed the effects of working capital financing strategies on a single bank using multiple regression analysis. In the study, current ratio, long-term debt ratios, shortterm debt ratio, and permanent capital ratios were used as independent variables. As a result it is found that there is a significant relationship between current ratio and profitability. As for the other variables, the relationship was found to be insignificant [9].

As can be seen from the literature review, although there is a large number of studies on the relationship between WCR investment and profitability, the studies on the effects of WCR financing on profitability is very limited. Therefore, the aim of this study is to extend the literature on this subject by conducting an analysis for an emerging country, namely, Turkey. The results of this study will help managers increase the profitability of their firms by shedding light on the degree of short-term financing they use to increase the profits of the firms.
