Financial Risk

The increase in degrees of financial support of company or the increase in debt items which contract to pay interest such as bank loans and bonds etc. also causes to increase the possibility not to fulfill the commitment. This risk expressed as financial risk. The important one of factors which causes the formation of financial risk is to increase the rate of borrowing. Today, countries want to take advantage of the leverage created by borrowing and this behaviour is normal according to finance liteature. Reduction in repayment of business competence. Depending on the equity or foreign sources to finance the activities of the business occurs. According to the resource use of lower-cost foreign sources, the financial leverage effect, stock owners are upgrading their profits per share, due to the possibility of failure to pay back debts, increasing the riskiness of the securities issued by the enterprise. In terms of investor, the factors to increase the financial risk of company are increase in business debt, fluctuations in sales, the possibility of increase in raw material prices, the possibility of becoming obsolete production, increased competition, lack of working capital, management errors and strikes (Charles 1991, pp. 282-283).
One of the ratios used to determine the financial risk of companies is debt / total assets. This ratio shows the company‟s total investment is financed by debt percentage. The investors who want to invest in financial assets of the company’s desire to be lower this ratio. The low ratio means that the assurance of people invested in securities is high. This is one of the factors that reduce the financial risk (AĢıkoğlu 1983, pp.102-103). Bhandari (1988) examined the effect of leverage on stock returns for a long period from 1948 to 1981. Research results have revealed that the leverage ratio is statistically significant effect on stock returns. Demir et. al. (1996) researched the relationships between financial ratios and stock returns of the industrial companies by using annual data and there was not able to detect a significant relationship between stock returns and the price / earnings ratios. CanbaĢ, Düzakın and Kılıç (1997) highlighted key financial ratios used to estimate the stock returns such as the price / earnings (P/E), the market value / book value ratio (PD/DD), the ratios of the liquidity, profitability and capital structure. the ratios of the liquidity, financial structure and profitability were most important ratios which provides useful information to investors on the Istanbul Stock Exchange in this study. Aydoğan and Güney (1997) could have discussed to predict the extent of the effects of the dividend yield on the stock returns. According to the results, the returns of stock are at very high levels in periods following the months when high dividend yield is observed. In conclusion, the dividend yield is an important forecasting tool in terms of market timing. Abarbanell and Bushee(1998) investigated the relations between stock returns and financial ratios and whether or not to obtain returns above normal by using the fundamental analysis. Investories, receivables, gross profit margin, selling expenses, capital expenditure, the actual tax rate, stock valuation methods, the quality of audit and simultaneous changes in the factors of sales productivity of employees were used as indicator. The changes in inventory, capital expenditures and actual tax ratio are the most important indicators which provided to estimate the returns of stocks after a year. In addition, the changes of gross profit margin and sales expenses found that effective indicators on long term yields.
Aktas and Karan (2000) have attempted to predict stock returns with the help of logit model by using financial ratios. The predictive power of financial ratios is more robust than the basic indicators. Also, the correlation between the observed and predicted rankings of successful companies is statistically significant. Çıtak (2004) investagated the relationship between the financial ratios and the stock for the ISE 100 Index and tested the existence of the relationship between the P/E ratio which is the ratio of the stock market performance and the returns of stock at different periods by regression analysis. As a result of the analysis found significant relationships in the period. Lewellen (2004) investigated the effects of the financial ratios on explaining stock returns and the dividend yields are the best variable which is explained the stock return for the period of 1946 and 2000. Yılgör (2005) explained the impact of the changes in the financial structure of companies on the returns of stock and how these changes were perceived by investors between 1996 and 2000 period by setting up portfolios. The total debt / total assets was used in this study. The increase in the level of borrowing was used as a knowledge affecting the future of the company by investors during certain periods. However, this information don‟t show the continuity.

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