Financing of Working Capital Requirement and Profitability: Evidence from Borsa Istanbul Chemical, Petroleum, Rubber, and Plastic Sector

Abstract

This study investigates the relationship between the maturity of debt used to finance working capital requirement and profitability. The firms in Borsa Istanbul chemical, petroleum, rubber, and plastic sector are analyzed using two-step generalized method of moments (GMM) method over the 2005-2015 period. The results show a concave-shaped relation between the short-term financial debt that is used to finance the working capital requirement and profitability. The ratio of short-term financial debt increases profitability up to a point, and over this point, the effect of short-term debt on profitability is found to be negative. Furthermore, for financially flexible firms, the breakpoint of the short-term financial debt and profitability relation occurs at the higher levels of the short-term financial debt-to-working capital requirement ratio.