Exchange Rates and Firm Exit : An Examination with Turkish Firm-Level Data

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1 Exchange Rates and Firm Exit : An Examination with Turkish Firm-Level Data Nazlı Karamollaoğlu 1 Ege Yazgan 2 1 MEF University 2 Istanbul Bilgi University Girişim İstatistikleri Analizi Çalıştayı, Sabancı University Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

2 Motivation Micro-level empirical research has begun to find important results on the effects of currency variations on firms survival (Baggs et al. 2009; Baldwin and Yan, 2010). Recent research have documented heteregeneous reactions of firms to exchange rate variations depending on individual firms productivity levels (Berman et al., 2012). Main findings: Appreciation of the real domestic currency reduces the probability of survival of firms. The effect of real domestic currency appreciation on firms survival is larger for less productive firms. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

3 Contribution of the Paper Adds to the literature on the impact of currency appreciation on firms survival in the context of a developing country. Data Firm level New findings:fx appreciation decreases firms survival.less productive firms are more affected by domestic currency appreciations. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

4 Presentation Outline 1. Related Literature 2. Company Sector Accounts Database 3. Data 4. Empirical model 5. Results 6. Conclusion Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

5 Related Literature Micro-level empirical research on exchange rates and firm survival: Baggs et al. (2009), Baldwin and Yan (2010), Ekholm et al. (2012), Berman et al. (2012), Li et al. (2013), Heterogenous Firm Models: Melitz (2003), Chaney (2013). Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

6 Company Sector Accounts Database Which Information is gathered in the Database? General Information (Sector, Legal Status, Employment) Balance Sheet Income Statement Composition of Assets and Liabilities Sources and Uses of Funds Standart Ratios (Liquidity Ratios, Ratios of Financial Position, Turnover, and Profitability Ratios) Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

7 Company Sector Accounts Database The data obtained either directly from the companies or from the financial institutions that have credit relationship with the companies. The study covers only the participating firms those submit their financial statements regularly. Any firm whose data of last three years is not available is kept out of the analysis, which means the results released may not represent sectors as a whole The data is annual. Starting from 2011, Company Accounts are prepared according to NACE Rev.2 economic activity classification updated by European Statistics Office (EUROSTAT) for assessing new and developing sectors and analyzing them in accordance with international standards. All data are checked for consistency by sector experts at CBRT. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

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11 Size Classification The size classification is made on the basis of net sales criterion of BACH (The Bank of Harmonized Data on Company Accounts), which functions under the General Directorate of the Economic and Financial Affairs of the European Commission, and the total assets criterion of the European Union. In Construction and Activities of Holding Companies -where annual net sales figures erratically change from year to yearthe total assets criterion, while in other sectors, the net sales criterion is used for scale classification. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

12 Size Classification Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

13 Sectoral Coverage Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

14 Number of Companies Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

15 Our Data Central Bank of Turkey Company Sector Database Annual data for the period firms belonging to 15 industries. All the real values are deflated using the sectoral-level PPI Real bilateral exchange rate data between U.S. dollar and Turkish Lira obtained from IMF. Weighted average of OECD countries s GDPs (constant prices) Domestic GDP Three-months deposit rate Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

16 Our Data Additional data from the Central Bank that contains information on the identity numbers of exited firms but not the exact date of the exit. In our analysis we do not take into consideration firms with incomplete employment data as we will rely on this variable when calculating labour productivity for each firm. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

17 Firm Survival We classify firms into two groups: Exiters from export markets (plants that export at the beginning of a period, but do not export at the end of the period). Continuing exporters (plants that export at both the beginning and the end of a period). Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

18 Descriptive Statistics Sample Variable mean N Survivors Age Employment Labour Productivity Export Share Real Assets Exiters Age Employment Labour Productivity Export Share Real Assets Whole Sample Age Employment Labour Productivity Export Share Real Assets Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

19 Number of Firms and Exit Year Industry Nace Rev.1.1. Code Number of Firms Exit Rate Food products and beverages Tobacco products Textiles Wearing apparel Wood and of products of wood Publishing printing and reproduction of recorded media Chemicals and chemical products Rubber and plastic products Other non-metallic mineral products Fabricated metal products except machinery and equipment Machinery and equipment n.e.c Electrical machinery and apparatus n.e.c Medical precision and optical instruments Motor vehicles trailers and semi-trailers Sum Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

20 Questions Does exchange rate appreciation have any effect on firm survival? Does exchange rate appreciation have lower impact (on survival) for more productive firms? Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

21 Empirical Methodology Question 1: Does exchange rate appreciate have any effect on firm survival? We follow Baggs et al.(2009) s methodology to investigate the firms survival behavior as a result of exchange rate movements Probit Estimation: P(Surv it ) = φ(β 1 Q t + β 2 P it + β 3 GDP f t + β 4 GDP d t+ Linear Probability Model: β 5 r t + β 6 AGE it + β 7 EMP it + β 8 t + ɛ it ) (1) Y it = α 1 Q t + α 2 P it + α 3 GDP f t + α 4 GDP d t + α 5 r t + α 6 AGE it + α 7 EMP it + α 8 t + ɛ it (2) Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

22 Probit Estimation Dependent variable: = 1 if survives to end of year t; 0 otherwise. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

23 Linear Probability Model Dependent variable: = 1 if survives to end of year t; 0 otherwise. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

24 Empirical Methodology Question 2: Does exchange rate appreciation have lower impact (on survival) for more productive firms? Linear Probability Model: Y it = α 1 Q t + α 2 GDP f t + α 3 GDP d t + α 4 r t + α 5 D H + α 6 (D H Q t ) + α 7 EMP it + α 8 t + ɛ it The coefficient of the interaction term tells the DIFFERENCE between high and low productivity firms in the effect of the exchange rate on survival. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

25 Linear Probability Model Dependent variable: = 1 if survives to end of year t; 0 otherwise. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

26 Empirical Methodology Question 2: Does exchange rate appreciation have lower impact (on survival) for more productive firms? Probit: P(Surv it ) = φ(β 1 Q t + β 2 GDP f t + β 3 GDP d t + β 4 r t + β 5 D H + β 6 (D H Q t ) + β 7 AGE it + β 8 EMP it + β 9 t + ɛ it ) 2 F / P D H = (β 1 + β 6 )[Φ (β 1 Q t + β 5 + β 6 Q t + X β) Φ (β 1 Q t + X β)] β 6 where X β = β 2 GDP f t+β 3 GDP d t+β 4 r t +β 7 AGE it +β 8 EMP it +β 9 t+ɛ it Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

27 Interaction Term 2 F / P D H = (β 1 + β 6 )[Φ (β 1 Q t + β 5 + β 6 Q t + X β) Φ (β 1 Q t + X β)] β 6 where X β = β 2 GDP f t+β 3 GDP d t+β 4 r t +β 7 AGE it +β 8 EMP it +β 9 t+ɛ it As it has been pointed out by Ai and Norton (2003): The interaction effect could be nonzero, even if β 6 = 0 The interaction effect is conditional on the independent variables, The interaction effect may have different signs for different values of covariates. Therefore, the sign of β 6 does not necessarily indicate the sign of the interaction effect. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

28 Probit Estimation Dependent variable: = 1 if survives to end of year t; 0 otherwise. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

29 Probit Estimation Dependent variable: = 1 if survives to end of year t; 0 otherwise. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

30 High Productivity Firms Dependent variable: = 1 if survives to end of year t; 0 otherwise. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

31 Low Productivity Firms Dependent variable: = 1 if survives to end of year t; 0 otherwise. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

32 Conclusion The results suggest that real exchange rate appreciation decreases the probability of survival in traded industries. High(low) productivity firms have higher(lower) probability of survival than low(high) productivity firms in traded industries in the presence of exchange rate variation. Karamollaoğlu, Yazgan Exchange Rates and Firm Exit May / 32

PRESS RELEASE. The Overall Turnover Index in Industry in July 2017, compared with June 2017, recorded an increase of 2.1% (Table 6).

PRESS RELEASE. The Overall Turnover Index in Industry in July 2017, compared with June 2017, recorded an increase of 2.1% (Table 6). HELLENIC REPUBLIC HELLENIC STATISTICAL AUTHORITY Piraeus, 19 September 2017 PRESS RELEASE TURNOVER INDEX IN INDUSTRY: July 2017, y-o-y increase of 8.6% The evolution of the Turnover Index in Industry with