Unlocking profitability in Borsa Istanbul: The impact of noncash credit and maturity breakdown of cash credit on corporate performance

Abstract

Companies use either internal or external sources of financing to fund their operating or capital expenditure. When internal resources prove inadequate, businesses may turn to external financing options, such as issuing debt or equity in the capital market. In bank-dominated financial markets, cash credit is the primary funding source for most companies. In addition to cash credit, banks provide noncash credit instruments, such as letters of credit and letters of guarantee for international trading activities, obtaining working capital, or supporting participation in public and private tenders, for a fee. Surprisingly, prior research has not thoroughly explored the impact of noncash credit and the maturity breakdown of cash credit on corporate financial performance. Our study fills this gap by analyzing the effects of these factors on profitability of firms traded in Borsa Istanbul. The findings reveal a significant positive impact on firms' profitability of both noncash credit and long-term cash credit, but cash credit with shorter maturity does not significantly contribute to profitability. Moreover, financial risk, cash ratio, firm size, and inflation are identified as strong drivers of firms' financial performance. These findings have important implications for firms, banks, and regulators.